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1-1-2006
Balancing Regulations and Incentives for Foreign
Direct Investment: a Case Study of Mexico and
Kazakhstan
Dauren B. Tynybekov
University of Georgia School of Law
Repository Citation
Tynybekov, Dauren B., "Balancing Regulations and Incentives for Foreign Direct Investment: a Case Study of Mexico and Kazakhstan"
(2006). LLM Theses and Essays. Paper 90.
http://digitalcommons.law.uga.edu/stu_llm/90
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BALANCING REGULATIONS AND INCENTIVES FOR FOREIGN DIRECT
INVESTMENT: A CASE STUDY OF MEXICO AND KAZAKHSTAN
by
DAUREN B. TYNYBEKOV
(Under the Direction of Professor Gabriel Wilner)
ABSTRACT
Foreign Direct Investment (FDI) has a global character. As globalization grows,
foreign direct investment grows. This research analyses the relationship between foreign
direct investment and developing countries. The main contributors to foreign direct
investment are multinational corporations and this research will show the impact of this
kind of investment on the economy of developing countries. The research will show the
way the developing countries try to benefit from FDI in order to complement their
economic growth. This thesis will analyze the incentives and regulations the developing
countries use to attract FDI and what needs to be done to make this type of investment
beneficial for developing world. The thesis concludes that countries can not rely only on
FDI as a panacea for treating economic and social problems. The governments should
regulate FDI accordingly to benefit the economy and people.
INDEX WORDS:
Foreign direct investment, Foreign investment law, Foreign
investors, International trade, International agreement, North
American Free Trade Agreement, Sustainable development,
Isolationist policy, Import substitution, Mexico, Kazakhstan,
United States of America, Soviet Union, Soviet, Russia.
© 2006
DAUREN B. TYNYBEKOV
All Rights Reserved
BALANCING REGULATIONS AND INCENTIVES FOR FOREIGN INVESTMENT:
A CASE STUDY OF MEXICO AND KAZAKHSTAN
by
DAUREN B. TYNYBEKOV
Electronic Version Approved:
Maureen Grasso
Dean of the Graduate School
The University of Georgia
December 2006
Major Professor:
Gabriel Wilner
Committee:
Charles R. T.
O’Kelley
Gabriel Wilner
iv
DEDICATION
To my wife, without whom this School of Law would be just a fantasy
v
ACKNOWLEDGEMENTS
I want to express my gratitude to Professor Gabriel Wilner for being my advisor in
this research. I would also want to thank Professor Charles O’Kelley for his comments and
valuable advice. I also want to thank Professor Wilner for a great experience that I had while
studying in the L.L.M program. Many thanks to Rebecca O’Grady, she was always in the
right place at the right time. My thanks are also to: Page Otwell, Nelda Parker and all my
fellow students for their optimism and support. Special thanks to Ann Burnett for her patient
guidance through the “maze” of the Law Library and “Research Engines”. I feel deep
appreciation for my colleague-friend Laura Kagel who spent her precious time correcting my
style and grammar. And finally I want to express deep gratitude and love to my wife Tamara
for her tireless support and belief in me.
vi
TABLE OF CONTENTS
Page
ACKNOWLEDGEMENTS.............................................................................................................v
I. INTRODUCTION ........................................................................................................................1
II. MEXICO AND FOREIGN DIRECT INVESTMENT (FDI) .....................................................5
Historical Overview of FDI in Mexico .................................................................................5
Mexican Economic Miracle and Isolationism.....................................................................11
1973 Foreign Investment Law.............................................................................................14
1993 Foreign Investment Law and North American Free Trade Agreement (NAFTA).....18
Summary for Mexico...........................................................................................................27
III KAZAKHSTAN AND FOREIGN DIRECT INVESTMENT .................................................32
Overview of Economical and Political Situation in Kazakhstan in 1990s .........................32
1990 Foreign Investment Law and Auxiliary Laws Facilitating Investments.....................40
1994 Foreign Investment Law and 1997 Supplementary Law ............................................45
2003 Investment Law...........................................................................................................51
vii
IV. CONCLUSION........................................................................................................................57
BIBLIOGRAPHY..........................................................................................................................66
1
I. INTRODUCTION
To write about foreign direct investment, it is necessary to mention the global
character of this process: “As globalization continues, foreign direct investment,
including investment in developing economies, continues to grow each year."1
In this research, we will pay attention to FDI and developing countries. For the
developing countries, FDI may play an important role since FDI is a potential engine for
development, “as the foreigner employs and trains local personnel, indirectly encourages
secondary service providers and producers of goods, pays taxes, and-in some case-leaves
behind valuable know-how.”2 The flow of FDI to developing countries continues to grow
year after year.3 In the second half of 1990s FDI flow increased from Western Europe
and the United States to developing countries “peaking at US $ 1.3 trillion in 2001.”4
The main contributors to FDI are multinational enterprises (MNEs). It is now widely
recognized that the multinational enterprise can play an important role in the
industrialization of different countries.5 Generally, the MNEs contribute toward the
industrialization of a country through foreign direct investment.6 In this research, we will
explore why the developing countries are so interested in FDI and prefer this type of
1 NOAH RUBINS & N. STEPHAN KINSELLA, INTERNATIONAL INVESTMENT, POLITICAL RISK AND DISPUTE
RESOLUTION, XXIII (2005).
2
Id. at XXVIII.
3
Id. at XXXI.
4
Id. at XXXI.
5
Kojo Yelpaala, In Search of Effective Policies for Foreign Direct Investment: Alternatives to Tax
Incentive Policies, 7 NW. J. INT’L L. & BUS. 208, 209 (1985).
6
Id.
2
investment to the usual financial loans from international institutions, which also allow
a country to develop its economy. Probably one of the answers would look like this: “The
sharp decrease in net commercial bank loans to developing countries in the 80’s, from a
peak of $44.4 billion in 1981 to a low of negative $4.1 billion in 1990, brought about
renewed interest in other sources of private investment capital, including foreign direct
investment.”7
For a discussion of this thesis, it is important to establish the meaning of FDI. The
shortest definition is: “Foreign Direct Investment – overseas investment by multinational
enterprises.”8 This does not, however, explain how MNEs make this investment. Is it just
a financial investment given to a country by a private party under certain conditions?
Who is the beneficiary of this investment? Is there a government that receives a loan or a
private party that manages to look attractive to foreign investors and at the same time
trustworthy enough to get an investment? A more detailed explanation would look like
this:
Foreign direct investment reflects the objective of obtaining a lasting
interest by a resident entity in one economy (“direct investor”) in an entity
resident in an economy other than that of the investor (“direct investment
enterprise”). The lasting interest implies the existence of a long-term
relationship between the direct investor and the enterprise and a significant
degree of influence on the management of the enterprise. Direct
investment involves both the initial transaction between the two entities
and all subsequent capital transactions between them and among affiliated
enterprises, both incorporated and unincorporated.9
7
IBRAHIM F.I. SHIHATA, LEGAL TREATMENT OF FOREIGN INVESTMENT, 1 (1993)
Glossary available at http://www.bized.ac.uk/virtual/dc/resource/glos3.htm (last visited on February
22nd, 2006)
9
OECD BENCHMARK DEFINITION OF FOREIGN DIRECT INVESTMENT, THIRD EDITION, 3 (1996)
8
3
An investor may be “an individual, or incorporated public or private enterprise, a
government, or a group of related individuals.”10.
During the Earth Summit11 in 1992, it was estimated that between 1993 and 2000 the
developing world would need $600 billion annually to achieve sustainable development
and it was asserted that governments alone would not be able to meet that goal.12 In this
situation, “FDI can indeed play a role in the economic growth of debt-burdened Third
World nations.”13
This research will demonstrate the impact of FDI on different countries, but the main
focus will be on Mexico and the Republic of Kazakhstan, including analysis of the
domestic policy of both countries towards foreign direct investment.
Mexico and Kazakhstan were chosen due to the relative similarity of their legal
systems; both countries are civil law countries. Also Mexico and Kazakhstan have similar
attitudes toward foreign influence which similarly affected the history of their economic
development. The Republic of Kazakhstan was a part of the USSR and thus was closed to
direct contacts with other countries, which in part explains the plethora of laws, decrees
and regulations concerning foreign investments and adopted during the short history of
modern Kazakhstan. The history of economic development in Mexico and other countries
in Central and South America reflects those countries’ feeling of distrust towards their
powerful northern neighbor: “The 1960s and 1970s were periods during which foreign
10
Id.
The Earth Summit was an International conference held in Rio de Janeiro in 1992 to discuss issues
concerning climate change, world poverty, environment and development, the worlds forest and
biodiversity.
12
Sophie Hsia, Foreign Direct Investment and the Environment: Are Voluntary Codes of Conduct and SelfImposed Standards Enough? 9 ENVTL. LAW. 673, 675 (2003).
13
CYNTHIA DAY WALLACE AND CONTRIBUTORS, FOREIGN DIRECT INVESTMENT IN 1990s, ix (1990).
11
4
investment and multinational corporations were considered threats to national
sovereignty and economic development.”14 Kazakhstan has a very long border with the
Russian Federation,15 which explains active interaction between the two countries in all
possible fields including politics, economics and culture. Thus, the research about
Mexico’s economic relationship with the United States would be a relevant example in
terms of economic interactions between the developing and developed worlds.
14
Id. at 2.
The length of the Kazakh-Russian border is approximately seven thousand kilometers, available at
http://www.eurasianet.org/resource/kazakhstan/hypermail/200409/0021.shtml (last visited on March 3,
2006).
15
5
II. MEXICO AND FOREIGN DIRECT INVESTMENT
Historical Overview of FDI in Mexico
Mexico provides a useful basis for a case study of FDI because "Mexico has an
economic and institutional history similar to that of many developing countries,
particularly those of Latin America."16 The legal system in Mexico is “based on Spanish
civil law with some influence of the common law tradition.”17 To evaluate Mexico's
attitude to foreign direct investment, it is necessary to be familiar with the Mexican
history of economic development and especially with the history of foreign direct
investment.18 Foreign direct investment in Mexico has a long history and its prominent
start was induced by the time General Porfirio Diaz19 “seized power in 1876, and the
Mexican government committed itself to aggressively wooing foreign investments.”20
FDI was needed for building infrastructure, especially railroads. Using foreign capital,
about 24,000 kilometers or railroads were constructed by 1911.21 This spurred “the
further development of export economies in Mexico’s agricultural and mining areas, the
16
SARAH BABB, MANAGING MEXICO: ECONOMISTS FROM NATIONALISM TO NEOLIBERALISM 12 (2001).
TIM L. MERRILL & RAMON MIRO: MEXICO: A COUNTRY STUDY 244 (1997).
18
Gloria Sandrino, The NAFTA Investment Chapter and Foreign Direct Investment in Mexico: A Third
World Perspective, 27 VAND. J. TRANSNAT'L L. 259, 282 (1994).
19
Porfirio Diaz was president of Mexico two times: in 1876-80 and 1884-1911, available at
http://www.mexconnect.com/mex_/history/presidents.html (visited on April 7th, 2006).
20
JURGEN BUCHENAU, MEXICO OTHERWISE, MODERN MEXICO IN THE EYES OF FOREIGN OBSERVERS, 91
(2005).
21
JAMES D. RUDOLPH: MEXICO: A COUNTRY STUDY 165 (1985).
17
6
22
modernization of the cities, and the emergence of a sizeable urban middle class.” At
the time, foreign investment was “attracted to Mexico by its potential resources and by
the political stability of the Porfirian peace.”23 The policy of attracting foreign investment
influenced the development of foreign trade. In 1872 when Porfirio Diaz came to power
the amount of imports and exports were $20 million and $29 million respectively, but by
the end of his presidency these figures had increased tenfold to $205 million in imports
and $293 million in exports.24 Trade with the United States “stands out as a dominant
factor, especially with the construction of railroad connection between two countries.”25
Most of Mexican history is connected with its powerful northern neighbor and this is
probably one of the reasons Mexico continuously stresses the importance of national
independence and sovereignty. The importance of protecting its sovereignty is entrenched
in the Mexican Constitution where the following sectors of activities are under
government control: “Petroleum and all hydrocarbons, basic petrochemicals, electricity,
nuclear energy and radioactive materials, telegraph and radio telegraph services, satellite
communication, railroads, mail service, money issue and coinage.”26
Throughout its economic history, Mexico has implemented different development
policies but they have all emphasized national sovereignty. “Mexican economics
encompassed a broad spectrum of tendencies, from Marxist to populist to
22
BUCHENAU, supra note 20, at 91.
RUDOLPH, supra note 21, at 165.
24
HUBERT C. HERRING & KATHARINE TERRILL, THE GENIUS OF MEXICO, LECTURES DELIVERED BEFORE
THE FIFTH SEMINAR IN MEXICO, 1930, 171 (1931).
25
Id. at 171.
26
SEYMOUR J. RUBIN & DEAN C. ALEXANDER: NAFTA AND INVESTMENT 6 (1995).
23
7
developmentalist – but was always and everywhere a fundamentally nationalist and
statist discipline."27
Since foreign direct investment is an “investment made by a foreign individual or
company in the productive capacity of another country,” 28 manufacturing and production
have an important place in the economic development of a country. The disadvantage for
Mexico lies in its dearth of coal, iron, and large waterfalls.29 Manufacturing large
quantities of goods for export was a remote idea in the first half of the twentieth
century.30 Such an opinion was buttressed by American and Mexican scholars.31 But by
1994, twenty eight percent of the Mexico GDP (gross domestic product) derived from
mining, manufacturing, and construction; “most industrial goods were produced,
including automobiles, consumer goods, steel and petrochemicals.”32
By 1911, Porfirio Diaz’s tenure as president was coming to an end.33 At this time,
growing concerns about Mexican sovereignty arose and, as a result, the growing
nationalistic trends in Mexico’s relationship with the foreign investors became more
significant as “the economic penetration of Mexico by foreign enterprises triggered a
growing fear of increasing foreign influence.”34 During the Diaz presidency, Mexico
modernized and became integrated into the world market but vital parts of its economy
27
BUBB, supra note 16, at 12.
One of the definitions of foreign direct investment available at
http://www.jubileeaustralia.org/512_jubilee_debt_jargon.php (last visited on April 6th, 2006).
29
HERRING & TERRILL, supra note 20, at 170.
30
Id, at 171.
31
Id, at 170.
32
MERRIL & MIRO, supra note 17, at XXVI.
33
Porfirio Diaz was president of Mexico two times: in 1876-80 and 1884-1911, available at
http://www.mexconnect.com/mex_/history/presidents.html (visited on April 7th, 2006).
34
Sandrino, supra note 18, at 283.
28
8
were under foreign control and thus the role of the Mexican government was limited to
managing economic development.35
The Mexican revolution of 1910 was the event which reversed the political current of
excessive foreign control over the economy. The constitution which followed embodied
its revolutionary principles “including sovereignty and independence from foreign,
economic, and political control.”36
In Article 27 of the Mexican Constitution, ownership rights to “land, waters and their
appurtenances” belong to Mexicans by “birth or naturalization.”37 In the same article, it is
stipulated that foreigners can get the same right if they agree to be regarded as Mexican
citizens, thus to become subjects under Mexican law, and not to invoke the protection of
their governments.38 A very important part of the new constitution became Article 123,
which regulated relationships between employers and employees and which had very
socialist overtones.39
The impact of revolution initially was very negative, because the economy was
disrupted and many of the gains achieved during the Porfiriato were destroyed.40
In the first decade of the revolutionary era a national state barely existed in Mexico.41
The Great Depression of 192942 also negatively influenced the state’s welfare, bringing a
“sharp drop in national income and internal demand after 1929” and challenging the
35
Id.
Id.
37
THE MEXICAN CONSTITUTION OF 1917 COMPARED WITH THE CONSTITUTION OF 1857 18 (H.N. BRANCH,
TRANS. AND ARRANGED, 1917).
38
Id.
39
Id. at 94 (Article 123 lists a wide variety of limitations on child labor and female labor, limitations on
working hours and days. It also stipulates conditions for minimum wages, etc.)
40
HERRING & TERRILL, supra note 24, at 145.
41
RAYMOND VERNON, THE DILEMMA OF MEXICO’S DEVELOPMENT. THE ROLES OF THE PRIVATE AND
PUBLIC SECTORS. 59 (1963).
36
9
43
country’s ability to fulfill its constitutional mandate of social equity. Nevertheless, the
Great Depression did not hit the Mexican economy as hard as other countries and in the
early 1930s a slow recovery started in manufacturing and other sectors.44
The nationalistic approach to protection of its economic independence continued in
Mexico until the 1980s. “For more than sixty years, the interventionist, nationalist
Mexican state, created by the Mexican Constitution, contributed significantly to the
regulation of foreign direct investment.”45 During those times “this so-called nationalistic
period, foreign direct investment provided the most direct challenge for the state
policy.”46
In the 1930s, the main effect of the structural reforms was to further the process of
nationalization. Nationalization involved such strategic sectors as the railroads and oil
industries, and accelerated land reform.47 One of the most important industries in Mexico
was and is the oil industry. “Each Mexican administration, in succession, tried to capture
a share of the profits which oil exports were generating.”48 The battle for oil continued
until 1938, when Lazaro Gardenas, president of Mexico from1934 to1940, nationalized
the oil industry by expropriating assets of American and British oil companies.49 A strong
tradition of viewing FDI with hostility is a ubiquitous feature in Latin America “with
42
The Great Depression of 1929 which took place in the United States of America.
Id. at 146.
44
Id.
45
Sandrino, supra note 18, at 281.
46
Id.
47
MERRIL & MIRO, supra note 17, at 146.
48
VERNON, supra note 41, at 77.
49
Jim Tuck, Mr. Clean, The Phenomenon of Lazaro Cardenas 1990, available at
http://www.mexconnect.com/mex_/history/jtuck/jtlcardenas.html (last visited on April 9th, 2006).
43
10
50
Mexico being a prime example.” This tradition may be interpreted as “the imposition
of strong foreigners on the local economy.”51 Following mass nationalization in the
1930s, Mexico introduced a policy of import substitution in the 1940s.52 During World
War II, Mexico sold oil to the United States and Great Britain.53 After World War II,
President Valdez launched a full scale import-substitution program by raising import
controls on consumer goods but relaxed them on capital goods, using international
reserves accumulated during the war.54 The Mexican government took measures (e.g.,
undervaluing the peso) in order to reduce the prices of imported capital goods and
increase productive capacity.55 This policy of import substitution and developing its own
industry and infrastructure reflected the general policy elaborated by the United Nations
Economic Commission for Latin America (ECLA)].56 The idea was based on denying
classical economic theory about “comparative advantage” according to which rich and
poor countries could specialize in different kinds of export and thus equally benefit from
free international trade.57 Instead ECLA proclaimed that developing countries “[n]eeded
at all costs to industrialize through active government policies aimed at protecting “infant
industries” from foreign competition and protecting salaries to maintain demand for
domestically produced industrial products.”58
50
MICHAEL J. TWOMEY, A CENTURY OF FOREIGN DIRECT INVESTMENT IN MEXICO 4 (2001), http://wwwpersonal.umd.umich.edu/~mtwomey/fdi/MexInv.pdf (last visited on April 9, 2006).
51
Id.
52
MERRIL & MIRO, supra note 17, at 146.
53
Jim Tuck, Mr. Clean: THE PHENOMENON OF LAZARO CARDENAS 1990, available at
http://www.mexconnect.com/mex_/history/jtuck/jtlcardenas.html (last visited on April 9th, 2006).
54
MERRIL & MIRO, supra note 17, at 147.
55
Id.
56
BABB, supra note 16, at 7.
57
Id.
58
Id.
11
Mexican Economic Miracle and Isolationism
In Mexico, the years 1940-1970 were the years of economic growth and of social and
political stability referred to as the period of the “Mexican economic miracle.”59 During
this period in Mexico industrial activity grew an average of 7.2% a year, and many of the
country’s important businesses in the production of consumer goods were established.60
As for foreign direct investment, the Great Depression slowed “the flow of foreign direct
investment to a trickle,”61 and this type of foreign investment was not of great importance
in Mexico’s “tightly regulated, isolationist economy.”62 In the 1950s, foreign direct
investment in Mexico was only a small fraction of the GDP: 0.17.63
FDI as we know it now, appeared in the second half of the twentieth century; “its
dominant mode-expansion by a firm which developed technology and productive
capacity in its home country, to other sites via subsidiaries and branch plants had been
nearly unknown before World War I in Mexico or anywhere else.”64 Most of the foreign
loans in Mexico were used by foreigners who operated the railroads, public utilities, and
59
EMMANUEL RAUFFLE, THE BRIEF ACCOUNT OF MEXICO’S EXPERIENCE WITH INTERNATIONAL BUSINESSES
3 (2004), http://zonecours.hec.ca/documents/H2005-P6-359694.ERauffletMexicoIntro.doc (last visited on
April 15, 2006).
60
Id.
61
BABB, supra note 16, at 7.
62
Michael W. Goldman et al, An Introduction to Direct Investment in Mexico, 5 IND. INT’L & COMP. L.
REV. 101, 101 (1994).
63
STEPHEN HABER, DEVELOPMENT STRATEGY OR ENDOGENOUS PROCESS? THE INDUSTRIALIZATION OF
LATIN AMERICA, 46 (2005).
http://www.stanford.edu/~haber/papers/Development_Strategy_or_Endogenous_%20ProcessThe_Industrialization_of_Latin_America.pdf (last visited on April 15, 2006).
64
MICHAEL J. TWONEY, A CENTURY OF FOREIGN DIRECT INVESTMENT IN MEXICO 14 (2001), http://wwwpersonal.umd.umich.edu/~mtwomey/fdi/MexInv.pdf (last visited on April 16th, 2006).
12
other free-standing companies. Lending of foreign capital to Mexican entrepreneurs
was minimal.65
By the 1970s import substitution started to slow down, exhibiting the symptoms of
chronic unemployment, chronic inflation, currency overvaluations and balance of
payments problems.66 The situation was complicated by the so-called “rebirth” of global
finance when it became possible for Latin American countries (including Mexico) to
borrow from private foreign sources at variable interest rates to address “long-standing
economic and social problems.”67 Due to the “anti-inflationary policy in the United
States, global interest rates began to rise, heavily indebting governments, and in 1982
Mexico, had the honor of inaugurating the Third World debt crisis when the Mexican
finance minister declared that Mexico would be unable to continue servicing its external
debt.”68
The policy of import substitution in Mexico still necessarily involved foreign
investment in the industrial sector. “Mexico’s adoption of a nationalistic importsubstitution economic policy made it reliant on the United States for industrial
technology.”69 The period of the economic miracle did not however affect the whole
country; some regions suffered from high unemployment. Therefore, in 1965, the
government of Mexico introduced the Border Industrialization Program which involved
the creation of the Maquiladora Sector-a program to encourage the production of articles
65
Id.
BABB, supra note 16, at 9.
67
Id.
68
Id.
69
Melissa R. H. Hall, Foreigners Funding the Future: Investment Opportunities in Mexico’s Privatized
Pension System, 34 TEX. INT’L L.J. 151, 154 (1999).
66
13
70
with foreign source components for export. This program was originally designed to
“promote industrialization in the border region, to create sources of employment and to
attract new technology in the hope that it could be integrated into Mexico’s industrial
base.”71 Maquiladora plants were fully foreign-owned corporations where Mexico “relied
on the foreign direct investment that arises from the operations of the Maquiladora
industry to provide the economy with employment opportunities, technology and
diversity.”72 The Maquiladora program was introduced after the United States
prohibited Mexican seasonal workers from performing farm work in the United States
(1964 cancellation of Bracero Programm).73 Article 123 of the Mexican Constitution
stipulates that the minimum wage of an employee must be “sufficient to satisfy the
normal material, social and cultural needs of heads of a family and provide for the
compulsory education of his children.”74 American company owners of the factories in
the Maqiladora sector do not pay the sufficient minimum wage. The average hourly wage
“roughly calculates to about $4.46 for harder, and sometimes, life-threatening work that
does not provide a Mexican family with enough food to keep from starving.”75 Already,
through the example of the Maquiladora program, it was evident that the Mexican policy
of import substitution did not completely exclude foreign investments. One commentator
70
RUBIN, ALEXANDER, supra note 26, at 38.
Id.
72
Jenna L. Acuff, The Race to the Bottom: The United States’ Influence on Mexican Labor Law
Enforcement, 5 SAN DIEGO INT’L L.J. 387, 404 (2004).
73
Id. at 392.
74
Id. at 405.
75
Id.
71
14
suggests that “the Mexican government has the philosophy that any job is better than
no job, even a low-paying one.”76
1973 Foreign Investment Law
Until 1973, Mexico had no single investment code on foreign investments and rules
on this activity “were characterized by an emphasis on increasing exports and protecting
existing national industries from domestic competition by foreign investors.”77 In
addition, the rules on foreign investments were represented by the various decrees
“issued by the executive branch on a case-by-case basis.”78 Throughout the era of the
Mexican economic miracle, the Mexican government was flexible and its attitude
towards foreign investors was “one of cautious acceptance.”79 Mexico, as any country,
was longing for foreign direct investments, and, as any county, was facing the problem
“of gain[ing] just that amount and kind of foreign investment (and technology) that is
desired to complement and support their development objectives while not losing the
benefits through competitive incentives by permitting them to flow out of the country.”80
Before the 1973 Foreign Investment Law (1973 FIL),81 foreign investments were
controlled by the Emergency Decree of 1944 whose purpose was to “avert disruption of
76
Id.
RUBIN & ALEXANDER, supra note 26, at 87.
78
Id.
79
Id.
80
JACK N. BEHRMAN, DECISION CRITERIA FOR FOREIGN DIRECT INVESTMENT IN LATIN AMERICA, XI
(1974).
81
The Emergency Decree of 1944 issued by the Mexican President granted control over foreign investment
to the Secretariat of Foreign Affairs.
77
15
82
the economy caused by the investments of temporary foreign capital.” The official
name of the 1973 FIL was: 1973 Ley Para Promover la Inversion Mexicana y Regular la
Inversion Extranjera [Law for Promoting Mexican Investment and Regulating Foreign
Investment] which indicates its purpose to regulate foreign investment while promoting
Mexican investment.83 Introducing the 1973 FIL, the government officially
acknowledged that: 1) import replacement policies alone were not sufficient to solve its
serious economic problems, 2) Mexican manufacturers needed to produce export-oriented
products and capital goods and 3) Mexico needed foreign assistance to improve
technology, stimulate investment in new industries, and manufacture goods for export.84
As the first legislation regulating foreign investment, it looked restrictive to many foreign
entrepreneurs. The general comment was that “this law was too anti-foreign investor and
the international business community did not react positively.”85 One of the main
obstacles in the 1973 FIL was Article 5, which limited foreign ownership in Mexican
corporations to forty-nine percent.86 A significant exception to this limitation exists in
relation to Maquiladora industries which may be 100% foreign-owned.87 But even with
these restrictions, the United States and other countries were ready to invest in Mexico’s
economy. The “country’s sustained growth during the preceding three decades, the
discovery of huge petroleum reserves and a relatively stable political climate made
82
RUBIN & ALEXANDER, supra note 26, at 87.
Hall, supra note 69, at 154.
84
Goldman et al., supra note 62, at 101, 107.
85
RUBIN & ALEXANDER, supra note 26, at 88.
86
Id.
87
Id, at 7.
83
16
Mexico an attractive location for direct investment.”
88
Most investment was in
infrastructure and technology.89 The 1973 FIL repeated the conditions stipulated in the
Mexican Constitution with respect to activities reserved to the Mexican government and
domestic investors such as petroleum, exploitation of radioactive minerals, electricity,
railroad, and telegraphic and wireless communications.90 The key body for administering
investment law was the National Foreign Investment Commission (NFIC)], which was
established by the Mexican Congress. NFIC possessed “broad discretionary power over
whether and to what extent to allow foreign investment.”91 This discretionary power
included establishing rules and guidelines and adjudicating issues raised under the 1973
FIL, specifically the authority to increase or decrease the percentage of foreign
investment in different geographical or economic zones, permit higher levels of foreign
ownership in “exceptional circumstances and also establish criteria and requirements
concerning foreign investment.”92 The conditions placed on increasing the share of
foreign ownership are listed in Article 13 of 1973 FIL: 1) complementing national
investment strategies, such as increasing exports; 2) providing new employment
opportunities for Mexican workers; 3) contributing to the development of economically
less developed regions; 4) respecting the country’s social and cultural values; and 5)
assisting in the country’s technological research and development.93 These characteristics
would justify the country’s efforts to “encourage long-term sustainable growth” targeted
88
Hall, Supra note 69, at 154 quoting Carlos M. Nalda, Note, NAFTA, Foreign Investment, and the
Mexican Banking System, 26 GEO. WASH. J. INT’L L. & ECON. 379, 386 n. 50 (1992).
89
Id.
90
RUBIN & ALEXANDER, supra note 26, at 88.
91
Goldman, et al., supra note 62, at 108.
92
Id.
93
Id.
17
94
by country-hosting foreign investments. Another basic condition stipulated in the
1973 FIL was also regarded by foreign entrepreneurs as a hindrance to doing business in
this country, The “Calvo Clause” which mandates that foreigners doing business in
Mexico waive their foreign status (diplomatic protection) while defending themselves in
Mexican courts.95 As mentioned above, the 1973 FIL did little to discourage foreign
direct investment in Mexico during the 1970s. The Mexican government and its agencies
“still enjoyed too much discretion to expand or limit the possible areas of investment.”96
Why do foreign direct investments continue to enter into Mexico? Legal
considerations play a large role in the decision to create FDI, but “legal concerns are not
themselves the driving force in the initial calculations.”97 In the case of Mexico, “other
factors play a greater role, such as the importance of access to raw materials, the size and
scope of the foreign market, or the geographical position of the target country in relation
to other important markets.”98 In 1976, Mexico’s financial situation (capital flight,
inflation, external account imbalances) “demanded more than domestic policy
changes.”99 The Central bank of Mexico had to devalue the peso and President
Echeveria’s administration asked the International Monetary Fund (IMF) for help and the
resulting Mexico-IMF agreement “obligated Mexico to change a number of its economic
policies as a condition to lending,”100 and “[s]imply put, multilateral and U.S.
94
SHIHATA, supra note 7, at 20.
Denise Manning-Gabrol, the Imminent Death of the Calvo Clause and the Rebirth of the Calvo Principle:
Equality of Foreign and National Investors, 26 LAW & POL’Y INT’L BUS. 1169, 1183 (1995).
96
Sandrino, supra note 18, at 298.
97
Tamara Lothian & Katharina Pistor, Local Institutions, Foreign Investment and Alternative Strategies of
Developments: Some Views from Practice, 42 COLUM. J. TRANSNAT’L L. 101, 109 (2003).
98
Id.
99
Sandrino, supra note 18, at 298.
100
Id.
95
18
government agencies, such as the World Bank, IMF and U.S. Treasury, were
committed to using debt relief as a lever to win market-oriented policy reforms from the
governments of developing countries.”101 The agreement with the IMF lasted only three
years.102 Massive oil discoveries in the late 1970s caused a short “rebirth” of nationalistic
policy focusing on a domestic agenda which resulted in heavy borrowings from
international financial firms based on future oil projections.103
1993 Foreign Investment Law and North American Free Trade Agreement
(NAFTA)
In 1981, due to a sharp fall in oil prices, Mexico entered a period of deep economic
crisis.104 This time was regarded by the government as an optimal time for economic
reform.105 President Miguel De La Madrid Hurtado106 started the structural reform with
the purpose of redirecting the economy from its “traditional state-led development and
trade protectionist strategy.”107 One of the most important steps was to open the domestic
market to foreign competition and a crucial step towards this goal was taken in 1986
when Mexico became a full member of General Agreement on Trade and Tariffs
(GATT),108 “which initiated a gradual elimination of some restrictions to foreign
101
BABB, supra note 16, at 10.
Sandrino, supra note 18, at 299.
103
Id.
104
Id.
105
Juan Carlos Moreno-Brid et al, Nafta and the Mexican Economy: a Look Back on a Ten-Year
Relationship, 30 N.C. J. INT’L L & COM. REG. 997, 1001.
106
Miguel de la Madrid Hurtado was the President of Mexico in 1982-88.
107
Id.
108
An agreement negotiated in 1947 among 23 countries, including US, to increase international trade by
reducing tariffs and other trade barriers, definition available at
102
19
109
investment, particularly in capital and technology intensive industries.”
Before
entering GATT, initial restructuring took place. In 1984 the Mexican government
cancelled the 49% ceiling on certain priority sectors. Then in 1985 the Mexican
government allowed foreign investors currently holding majority ownership interests in
Mexican business enterprises to raise their ownership interests to 100%.110 These
measures were followed by renegotiation with the IMF and other commercial
institutions.111 These and other measures, together with membership in GATT, promoted
confidence on the part of investors.112
In 1989, then President Carlos Salinas de Gortari,113 issued new 1989 Regulations on
the 1973 FIL (1989 Regulations).114 The official name of the document was:
“Reglamento de la Ley para Promover da Inversion Mexicana y Regular la Inversion
Extranjera (Regulations of the Law to Promote Mexican Investment and Regulate
Foreign Investment).”115 The Mexican Constitution gives the President the power to enact
regulations but the scope of regulation is necessarily limited to the underlying law.116 A
regulation contradicting the law could be described as unconstitutional by the Mexican
Supreme Court of Justice.117 The purpose of the 1989 Regulations was to help open
Mexico to foreign investment, but at the same time they had the potential to cause legal
http://www.google.com/search?hl=en&lr=&defl=en&q=define:GATT&sa=X&oi=glossary_definition&ct=
title (last visited on August 5, 2006).
109
Id. at 1002.
110
Goldman, et al. supra note 62, at 109.
111
Id.
112
Id. at 110.
113
Carlos Salinas de Gortari was President of Mexico in 1988-94.
114
See J. Hayden Kepner, Jr., Mexico’s New Foreign Investment Regulations: a Legal Analysis, 18
SYRACUSE J. INT’L L. & COM. 41 (1992).
115
RUBIN & ALEXANDER, supra note 26, at 89.
116
Id..
117
Id.
20
problems, since these regulations were “vague and confusing in many areas, and the
Mexican government exercises great discretion in interpreting many of its provisions.”118
Moreover, the 1989 Regulations as they are written appear to violate certain provisions of
Mexico’s Constitution.” 119 One clear contradiction between the 1973 FIL and 1989
Regulations is the reduction of Foreign Investment Commission role on deciding
ownership percentage by foreign investors. “The new regulations severely diminish the
NFIC’s authority in many areas and permit 100% foreign ownership in most industries
without requiring any NFIC authorization.”120 The regulations also cut numerous criteria
(from 17 to 5) for consideration whether to permit a particular foreign investment in a
restricted area.121
Did a potential foreign investor have to worry about the dubious character of new
regulations? Taking into consideration at least two factors, there do not appear to be
serious reasons for such concerns. First issuing the Regulations was the
responsibility of the president, and the presidency in Mexico is the paramount institution,
which critics labeled as the “six-year monarchy” due to “seemingly unchecked power that
historically resided in the office.” 122 And second, because of the Amparo – a unique
Mexican procedure for challenging the constitutionality of a law or an administrative
action by an individual through petition to the appropriate tribunal (that is, only Mexican
federal courts, including the Supreme Court).123 A competitor, who suffered due to a
118
Kepner, supra note 114, at 42.
Id.
120
Id, at 59.
121
Id.
122
MERRILL & MIRO, supra note 17, at 238.
123
Kepner, supra note 114, at 61.
119
21
foreign investor, may invoke the Amparo procedure, but even if he wins the case and is
granted an injunction, there will not be a “blanket” injunction against further government
acts, since there is no stare decisis in the Mexican federal courts.124 As for the Calvo
Clause mentioned earlier, in 1992, Mexican legislators, in order to support foreign
investment, enacted The Execution of Treaties Law, a very important addition to
Mexican Legal System.125 The importance of this law lies in the ability of the Mexican
government to make international treaties and agreements attracting international dispute
settlement mechanisms, since today’s international investors prefer to solve contractual
disputes with the help of international commercial arbitration, forum of law and choice of
law clauses.126 It would be also relevant to mention that Mexico is a signatory to the
United Nations Convention on the Recognition and Enforcement of Foreign Arbitral
Awards, also referred to as the New York Convention, and to the Inter-American
Convention on International Commercial Arbitration, which is also called the Panama
Convention.127 Both conventions give foreign investors confidence to use a legal basis
for “enforcement of any arbitral agreement.”128 As a member of these treaties, Mexico
agreed to “permit its citizens and its businesses to agree to have disputes resolved in
accordance with international norms rather than those established by its own
government.”129
124
Id. at 62.
RUBIN, ALEXANDER, supra note 26, at 90.
126
Id, at 91.
127
Hope H. Camp, Jr., Binding Arbitration: a Preferred Alternative for Resolving Commercial Disputes
Between Mexican and U.S. Businessman, 22 ST. MARY’S L.J. 717, 722 (1991).
128
Id. at 723.
129
Id. at 724.
125
22
Pursuing the policy of accelerating foreign investment in Mexico, President Salinas
started talks with President George H. W. Bush about a free trade and investment
agreement.130 With this new agreement the United States planned to “remove existing
barriers” for foreign investors, and in order to reach this objective it was necessary to
replace the existing law to promote Mexican investment and to regulate foreign
investment with a new law.131 On December 28, 1993 Mexico adopted the new 1993
Foreign Investment Law (1993 FIL).132
The task of the new law was “to formulate the rules to channel foreign investment into
the Nation and to ensure that said investment contributes to the national development.”133
The new law codified many of the 1989 Regulations to answer the requirements
stipulated by the NAFTA.134
The 1993 FIL had new provisions that were contrary to the 1973 FIL such as
cancellation of the rule 49/51 that gave foreign investors minority ownership in the
capital stock of Mexican companies. Now foreign investors can control up to 100% of the
capital stock of a Mexican enterprise, though with specific limitations depending on
certain industrial areas.135 Other provisions contrary to the 1973 FIL include the
elimination of most performance requirements, which earlier gave power to NFIC to
authorize foreign investment projects, and now left NFIC with only few evaluations of
foreign investment projects such as:
130
Acuff, supra note 72, at 411.
Id.
132
Brandon W. Freeman, An Overview of Foreign Direct Investment in Mexico, 3-AUT NAFTA: L. & BUS.
REV. AM. 123, 125 (1997).
133
Id.
134
Goldman et al, supra note 62, at 115.
135
Id.
131
23
1.
The impact on employment and training of workers
2.
The technological contribution of the project
3.
Fulfillment of environmental provisions
4.
The project’s general contribution to the increase in competency of the productive
goals of the country.136
Some provision of the 1973 FIL were incorporated into the new 1993 FIL unchanged,
for instance the activities reserved exclusively to the Mexican government or to Mexican
citizens and Mexican companies.137 Because the Mexican government accepted, under
NAFTA, that it must allow foreign investment in the construction of ducts for the
transportation of oil and its derivatives as well as the perforation of oil and gas wells, an
innovation in the 1993 FIL gave permission to foreign investors to participate in the
Mexican oil industry.138 President Salina’s administration, while facing many political
obstacles including clear opposition from some sectors of his party, managed to
overcome them and achieve this change.139
Following passage of the 1993 FIL, on January 1, 1994 Mexico entered the NAFTA
agreement with Canada and the United States, creating a free trade area where tariffs and
other barriers to trade were greatly reduced.140 Under Chapter Eleven of NAFTA, Mexico
was obliged to “accord to investors of another Party treatment no less favorable than that
it accords, in like circumstances, to its own investors…,” a standard known as “national
136
Id, at 116.
Id, at 117.
138
RUBIN & ALEXANDER, supra note 26, at 94.
139
Id.
140
For a discussion of Mexico’s entry into NAFTA see Freeman, supra note 132, at 128.
137
24
141
treatment”.
NAFTA also provides Most Favored Nation (MFN) treatment, which
requires every party to this agreement to treat other parties of NAFTA and their
investments no less favorably than third-party investors and investment.142 Both the 1973
FIL and the 1989 regulations contained lengthy and burdensome lists of performance
requirements.143 An important provision of NAFTA’s investment chapter repeals these
performance requirements, which had been one of the major obstacles faced by foreign
investors in Mexico.144 The performance requirements were one of the major obstacles
for foreign investors in Mexico.145 Article 1106 of NAFTA eliminates such barriers,
enumerating these requirements and strictly prohibiting a party from imposing or
enforcing them in connection with the establishment, acquisition, expansion,
management, conduct or operation of an investment of an investor of a Party or of a nonParty in its territory.146 This Article however did not repeal the performance requirements
completely:
A party may still condition the receipt of an advantage, in connection with
an investment in its territory of a party or of a nonparty, on compliance
with the requirement to locate production, provide a service, train or
employ workers, construct or expand particular facilities, or carry out
research and development in its territory.147
Law is a very important feature necessary for economic development and particularly
with foreign direct investment law plays a crucial role in the process of market-oriented
141
Hall, supra note 69, at 156.
Sandrino, supra note 18, at 309.
143
RUBIN & ALEXANDER, supra note 26, at 103.
144
Freeman, supra note 132, at 129.
145
Id.
146
RUBIN & ALEXANDER, supra note 26 (citing NAFTA, Annex I, I-M-4, at 103).
147
Freeman, supra note 132, at 130.
142
25
148
development.
Law has two purposes: 1) to define and enforce private rights,
especially the rights of foreign investors, and 2) to create the legal foundations for
market-oriented reform, which can guarantee the basis for economic development,
stability, and growth.149 As for the rights of foreign investors, NAFTA did not include a
Calvo Clause as an instrument in a dispute resolution. “NAFTA provides the most
remarkable and groundbreaking evidence of Latin America’s new attitude toward
international jurisdiction and law.”150 Chapter Eleven of NAFTA establishes a complex
mechanism for the settlement of private investment disputes for alleged breaches of
NAFTA Chapter Eleven Section A obligations.151 This dispute settlement mechanism
provides for resolution via international arbitration, rather than by a NAFTA dispute
panel.152
Among NAFTA members, disputes may be settled through international arbitration in
accordance with the International Center for Settlement of Investment Disputes
Convention153 or the U.N. Commission on International Trade Law Arbitration Rules,154
or through litigation before the courts of the NAFTA state, at the election of the
investor.155 For the first time, Mexico has entered into an international agreement
providing for investor-state arbitration.156
148
Lothian & Pistor, supra note 97, at 101.
Id. at 102.
150
Manning-Gabrol, supra note 95, at 1187
151
Goldman et al, supra note 62, at 124.
152
Id. at 125.
153
The International Center for Settlement of Investment Disputes, an institution of the World Bank group,
was founded in 1966 [hereinafter (ICSID)].
154
The “United Nations Commission on International Trade Law” is a body of member and observer states
under the auspices of the United Nations a[hereinafter (UNCITRAL)].
155
Sandrino, supra note 18, at 319.
156
Id. at 320.
149
26
NAFTA also has provisions covering expropriation and compensation. No party
may directly or indirectly nationalize or expropriate an investment of an investor in its
territory or take a measure, except when nationalization is: (a) for a public purpose; (b)
on a nondiscriminatory basis; (c) in accordance with due process of law and with
treatment in accordance with international law, including fair and equitable treatment;
and (d) is accompanied by payment to compensation equivalent to fair market value, paid
without delay and fully realizable with interest from the date of expropriation.157
NAFTA sets a very important example for third world countries in terms of changing
attitudes about foreign investment.158 Like Mexico, debt-burdened Third World countries
try to attract foreign investment by entering into arrangements that are changing the
traditional rules of investment protection, but none of these arrangements “has the broad
scope of protection for foreign investment found in the investment provisions in
NAFTA.”159
It would be useful to give a final look at the progress in Mexico’s approach to foreign
direct investment in a short review of 1973 and 1993 foreign investment laws. Both laws
have a purpose to channel FDI into the country on the condition of complementing
national development, but if 1973 FIL gave preference to Mexican investors and set
limitations for the foreign ones, 1993 FIL stresses the importance of the foreign
investment. 1973 FIL had a permit for only 49% of foreign ownership of Mexican
157
Freeman, supra note 132, at 132 citing NAFTA, drafted Aug. 12, 1992, revised Sept. 6, 1992, U.S.Can.-Mex., 32 I.L.M. AT 605 (entered into force Jan. 1, 1994).
158
Sandrino, supra note 18, at 323.
159
Id.
27
160
companies.
1993 FIL demised this rule and allowed foreign investors to have up to
100% shares in Mexican companies.161 Another vital change in 1993 FIL was the
reduction of performance requirements from seventeen to four, thus also limiting the role
of NFIC.162 In spite of Mexico’s desire to make 1993 FIL attractive for foreign investors,
this law still keeps the restrictive features of 1973 FIL, such as: activities reserved only
for the Mexican government and Mexican companies and people.163 And even the
permission to buy 100% shares in Mexican companies is limited by the sort of activity
where acquisition may vary from ten to forty nine percent of ownership and this list of
activities covers more than thirty names. 1993 FIL alone would be another source of
criticism from liberal economists, however NAFTA not only enforced the incentives for
foreign direct investment stipulated earlier in 1993 FIL but also widened the conditions
for International trade.164
Summary for Mexico
This section on Mexico traces the love-hate relationship between FDI and this Central
American country. It becomes apparent that, most of the time, Mexican political thought
centered on achieving self-sufficiency and that the “perceived need for self160
1973 Foreign Investment Law. Art 5. 12 Int’l Legal Materials, 643 (1973).
1993 Foreign Investment Law, Art 4 about the International Center for Settlement of Investment
Disputes.
162
Id. art. 29. The foreign investment commission is responsible for performance requirements.
163
Id. art 5, 6.
164
Chapter eleven of NAFTA not only repeals most of the performance requirements which was done in
1993 FIL but also introduces terms related to international trade, such as: most-favored-nation treatment
and National Treatment.
161
28
determination via isolationism resulted from years of oppression under Spanish rule
and was augmented by United States’ aggression in 1840’s.”165 The negative and
suspicious attitude was also burdened by Mexico’s aversion to foreign economic control
and political influence that can be “traced back to the administration of Porfirio Diaz.”166
The principles of the Mexican Revolution included sovereignty and independence from
foreign economic and political control.167 The Mexican Constitution of 1917, which
embodied these principles, discouraged, and in some areas prevented foreign direct
investment in Mexico for more than seventy years.168 In the 1980s, Mexico recognized
the necessity of attracting foreign investments and started “a major modification of its
foreign investment legislation.”169 Modifications included the 1993 FIL and participation
in NAFTA. According to Freeman, “The implementation of NAFTA and the New
Foreign Investment Law clears all doubts about the scope of the Calvo Clause in the
Constitution and marks a new era in Mexico’s international relations.”170 It is very
difficult to describe in a few words a political creed of this very important country,
because:
Unlike many other countries that have been committed to some ideology,
such as private capitalism, free enterprise, or socialism, Mexico has never
for long placed itself in an ideological straitjacket. At certain times and in
relation to specific events, such ideologies as nationalism, socialism, and
communism have attracted popular support. Yet rigid adherence to
ideology or doctrine has rarely hindered Mexico’s development drive.171
165
Godman et al, supra note 62, at 101.
Freeman, supra note 132, at 123.
167
Id.
168
Id.
169
RUBIN & ALEXANDER, supra note 26, at 13.
170
Freeman, supra note 132, at 134.
171
ROBERT E. LOONEY, MEXICO’S ECONOMY: A POLICY ANALYSIS WITH FORECASTS TO 1990, 25 (1978)
166
29
The era of President Salinas produced dramatic changes in the Mexican legal
system “so vast and deep that in those days it was common to refer to them as a legal
revolution.”172 Generally, public opinion supported those changes which were “shared by
capitalist groups, the general populace, and high-ranking federal officials,” who
enthusiastically proclaimed that Mexico had already become “a first world country.”173
Mexico’s membership in the OECD174 buttressed this opinion.175 A critical examination
reveals that Mexico “probably has not really given up anything, but has only gained.”176
For example, the Calvo Clause is still “enshrined” in the Mexican Constitution, so all
foreign investment laws and regulations adopted after 1985 can be revoked.177 One of the
reasons Mexico chose NAFTA dispute settlement mechanisms was to avoid political
interference in dispute resolution, “thus eliminating the need for foreign governments’
asserting diplomatic protection on behalf of their investors.”178 These facts, plus nonrefusal from Calvo Clause and the availability of international tools for dispute
resolution, show that Mexico regarded the years of liberal reforms as a trial period and
did not completely depart from its policy of economic independence. After ten years of
NAFTA, the concerns of its opponents have not been reduced by the passage of time and
172
Jorge A. Vargas, an Introductory Lesson to Mexican Law: from Constitutions and Codes to Legal
Culture and NAFTA, 41 SAN DIEGO L. REV. 1337, 1367 (2004).
173
Id.
174
OECD stands for Organization for Economic Cooperation and Development. The OECD is an
international agency which supports programs designed to facilitate trade and development [hereinafter
(OECD)].
175
Id.
176
Justin Daly, Has Mexico Crossed the Border on State Responsibility for Economic Injury to Aliens?
Foreign Investment and the Calvo Clause in Mexico After the NAFTA, 25 ST. MARY’S L.J. 1147, 1182
(1994).
177
Id.
178
Id.
“neither has the enthusiasm of its supporters been toned down.”
179
30
NAFTA’s advocates
list positive impacts of this agreement such as increased FDI (40%), the exports growth
(25%), higher per capita income (5%), and the availability of emergency loans to cure the
consequences of crises (a $50 billion support loan from the U.S. Treasury).180 Opponents
say that all NAFTA benefits were “more than compensated by its adverse effects on the
overall economy” and that benefits realized from the Agreement “have been highly
concentrated in relatively few firms.”181 The opponents also note the “erosion of
Mexico’s inter-industrial links,” the reduction of Mexico’s potential long-term economic
growth and the widening gap between the “haves” and “have-nots.”182 What may seem
like a success story, in fact, undermines economic development. The success has been
achieved “at the expense of the labor employed in these areas by the systematic lowering
of regulations.”183 Export Processing Zones remain simply assembly zones with the
materials being imported by the firms, assembled and then exported. For example “Ford’s
state-of-the-art engine assembly plant in Chihuahua exports more than 90% of its
production, and uses almost no local inputs other than labor.”184 We see the development
“with little in government revenue to improve the infrastructure of the country and no
possibility of local firms breaking into the supply chain.”185
179
Moreno-Brid et al, supra note 105, at 997
Id. at 998.
181
Id. at 999.
182
Id.
183
JANET DINE, COMPANIES, INTERNATIONAL TRADE AND HUMAN RIGHTS, CAMBRIDGE UNIVERSITY PRESS,
25 (2005)
184
Id. at 26. Also, Export Processing Zones ease tax and labor restrictions and their primary purpose is to
generate export revenues in poor developing countries, available at
http://en.wikipedia.org/wiki/Export_processing_zone (last visited on August 6, 2006)
185
Id.
180
31
There are also problems with the Mexican legal culture which “have a high rate of
concentration and practical use in urban centers like Mexico City, Guadalajara or
Monterey because of a common level of education, economic means and national cultural
patterns.”186 In rural areas, legal culture resources as well as basic economic means for
survival are absent; fifty million out of a total population of one hundred million in
Mexico lives at or below the poverty level.187 Only when Mexico becomes a middle class
country like the United States or Canada will the legal culture in that country become
varied and equally distributed and this can be done through the strengthening of the
educational system at all levels.188
186
Vargas, supra note 172, at 1364.
Id.
188
Id. at 1365.
187
32
III. KAZAKHSTAN AND FOREIGN DIRECT INVESTMENT
Overview of Economic Situation in Kazakhstan in 1990s
It is difficult to write about modern Kazakhstan in general and about foreign direct
investments in particular. The reason lies in the short history of sovereignty of this new
state in Central Asia. The Republic of Kazakhstan is the second largest republic in the
former Soviet Union.189. The large territory accommodates a disproportionately small
population of fifteen million people, consisting of different nationalities. The main ethnic
groups are: Kazakh 53.4%, Russian 30%, Ukrainian-3.7%, Uzbek-2.5%, German-2.4,
Tatar 1.7%, Uygur 1.4% and 4.7% are other nationalities.190 As a Soviet republic,
Kazakhstan’s economy was an inseparable part of the whole Soviet economic system of
central planning and state-owned enterprises. The economic foundation of the Soviet
Union was the principle of centralized economic planning.191 The central planning had a
universal character when “[a]ll of production and supply is subordinated to centralized
tasks.”192 Mostly the planning was performed on two levels: the top one was the USSR
Council of Ministers (Gosplan) and the lower one covered the Republican Council of
189
The territory of Kazakhstan is 2,7 million square kilometers available at
http://www.cia.gov/cia/publications/factbook/geos/kz.html (last visited on June 13, 2006).
190
Id.
191
See OLIMPIAD S. IOFFE, MARK W. JANIS, SOVIET LAW AND ECONOMY, 8 (1986)
192
Id. at 9.
33
193
Ministers (republican Gosplans).
Foreign trade in this respect was under strict
government control and was a part of the State’s foreign policy, “In the earliest years
following its creation, the foreign policy of the Soviet State was aimed primarily at
ensuring survival in an extremely hostile environment which threatened it on all sides.”194
At that time, for the Soviet Union foreign trade meant large scale procurement of
Western technology. Without American and European firms, the Soviet Union probably
would not have been able to construct and develop its steel and chemical industry, its
automotive industry, electro-technical industry and military industrial complex.195 For
instance, the biggest automotive plant in Gorky, (today Nizhnyi Novgorod) Russia was
built in the 1930s with the help of the Ford Company, and the whole agriculture tractor
plant was imported from the Chicago suburbs to the city of Stalingrad (today Volgograd)
and assembled there by the American companies International Harvester and Albert
Kahn, Inc.196 The main purpose of such contracts was the creation and development of
an independent Soviet industry.197 It was all done through the agreements on “technical
cooperation and aid” under which the USSR paid hard currency to Western companies.198
This kind of technical cooperation with foreign companies existed throughout the history
of the USSR. When the Soviet government was interested in developing technological
projects with foreign expertise, it usually negotiated and bought the whole project, but
foreign direct investment did not exist in the Soviet economy. The Soviet Union mostly
193
Id.
JEREMY RUSSELL, ENERGY AS A FACTOR IN SOVIET FOREIGN POLICY, 1 (1976).
195
Shpotov B. M., The Technical Aid of the West to the Soviet Industrialization, available at
http://www.pseudology.org/razbory/IndustriaGAZ.htm, (last visited on June 17, 2006)
196
Id.
197
Id.
198
Id.
194
34
sold its raw materials to the developed countries and in exchange bought equipment
and technology from them.199 Soviet leadership did not want “something foreign, born of
another type of organization and principles and transplanted into their system,” because it
would “not produce the same effect that it gives in its own environment.”200
The Soviet Union ceased to exist in December of 1991. “The dramatic events that
followed the change of leadership in 1985, culminated in the dissolution of the Soviet
Union.”201 As for Kazakhstan, on December 16, 1991, “a new law establishing the state
independence of the Republic of Kazakhstan was approved.”202 This independence was
not long awaited and dreamt of by the people and leadership of Kazakhstan. “Kazakhstan
was the last republic to leave the Soviet Union on December 16, 1991, following the
surprise announcement on December 8th by Russia, Belarus and Ukraine that they were
forming the Commonwealth of Independent States.”203
At the very beginning of its independence Kazakhstan faced many urgent problems, such
as “formation, strengthening and perfection of its statehood, ”transition from one type of
economy to another, problems of creating conformity in legislation and accepted models
of development among other things.204 Politically, the transition to independence went
smoothly enough to avoid ethnic tensions. In the Soviet era, Kazakhstan was called “the
laboratory of friendship” since more than a hundred nationalities called Kazakhstan their
199
See CONSTANTIN A. KRYLOV, THE SOVIET ECONOMY, 224 (1979).
Id.
201
Archie Brown, Reform, Coup and Collapse: The End of the Soviet Union (2001),
http://www.bbc.co.uk/history/worldwars/coldwar/soviet_end_01.shtml, (last visited on June 17, 2006.)
202
Zaure Ayupova, The Republic of Kazakhstan: Six Years of Independent Development, 6 TULSA J. COMP.
& INT’L L. 65, 65 (1998).
203
Philip M. Nichols, The Viability of Transplanted Law: Kazakhstan Reception of a Transplanted Foreign
Investment Code, 18 U. PA. J. INT’L ECON. L. 1235,
204
Ayupova, supra note 203, at 65.
200
35
205
home.
206
Also because the Great Silk Route
passed through Kazakhstan forming a
bridge between Asia and Europe the local population “has always been opened for
international dialogue.”207 Kazakh people throughout their history have led a nomadic life
and the source of Kazakh law was a customary law, “Historically, the most favorable
conditions for Islamic culture were the permanent settlements and city-states.”208 Islam
was not the religion of all Kazakh people. “While traces of fiqh and Shari’a of Islam can
be found in indigenous Kazakh law, Islam does not constitute a significant part of
Kazakhstan’s legal heritage.”209 The important influence on Kazakh law came from
Mongol law; “several portions of Kazakh law were taken directly from Great Yasa (law)
of the Mongols, and has also illuminated other portions of Kazakh law on which the Yasa
had a significant effect.”210 In 1928, eleven years after the Great October Revolution in
Russia, a Decree was enacted about “the struggle against crimes based on customs,”
which “[p]rohibited many of the practices that were required or provided for in Kazakh
law.”211
Like other former Soviet republics, Kazakhstan went through a difficult time of
modernization and transformation from a strictly centralized economy. The
manufacturing sector of the economy has it roots mostly in the World War II era, when
205
See CHUMICHEV ET AL, ACROSS MIDDLE ASIA AND KAZAKHSTAN, 337 (1973)
The Great Silk Route was an ancient trade route between China and the Mediterranean Sea, extending
some 6,440 km (4,000 mi) available at
http://www.bbc.co.uk/history/worldwars/coldwar/soviet_end_01.shtml (last visited on August 9, 2006).
207
Erzhan K. Dosmukhamedov, Legal Aspects of Doing Business in the Republic of Kazakhstan, 5-SPG
INT’L LEGAL PERSP. 93, 94 (1993).
208
Id.
209
Philip M. Nichols, The Fit Between Changes to the International Corruption Regime and Indigenous
Perceptions of Corruption in Kazakhstan, 22 U. PA. J. INT’L ECON. L. 863, 910 (2001).
210
Id.
211
Id. at 912.
206
36
Kazakhstan became the beneficiary of massive transplants of industries.
212
That is
probably one of the reasons that, Kazakhstan has “a bifurcated economy, with heavy
industry and collectivized agriculture in the north and large--scale agriculture--primarily
cotton--in the south.”213
As part of the Soviet Union, Kazakhstan shared its civil law tradition.214 The
constitution in a civil law tradition is “the core of the whole system of legislation and
incorporates the basic definitions.”215 In order to build a new democratic and civil society
where human rights, freedoms and the rule of law would be a priority, the leadership of
the country brought together experts from Great Britain, the United States and
Kazakhstan to draft a new constitution.216 The first constitution of independent
Kazakhstan was adopted on January 28, 1993.217
After reading this document thirteen years later, one may have the impression that the
country did not yet define its true paradigm of socioeconomic development. The 1993
Constitution of the Republic of Kazakhstan embodied many social features inherited
from the Soviet Union, for example, in a section on economic and social conditions, one
can read that, “A citizen of the Republic shall have the right to working conditions
meeting security and sanitary requirements, and also to social protection from
unemployment.”218 The payment-reward for the labor “should not be less than the
212
Nichols, supra note 209, at 1253.
Id.
214
Dosmukhamedov, supra note 207, at 95.
215
Id.
216
Id.
217
CIA- The World Fact Book available at http://www.cia.gov/cia/publications/factbook/geos/kz.html (last
visited on June 20, 2006)
218
N. Nazarbaev, President of the Republic of Kazakhstan, Appendix: The Constitution of the Republic of
Kazakhstan, 5-SPG INT’L LEGAL PERSP. 109, 112 (1993).
213
37
219
minimal wages set by law.”
The Constitution also stipulated the right of citizens to
housing, not only promoting “implementation of the right to housing by encouraging
house-building” but also by “selling of dwellings from the state housing fund.”220 The
same socially-oriented attitude referred to health care and education, but the important
feature which is clearly seen though the whole section on economic and social rights are
the conditions involving private initiative - letting private education and private
healthcare exist and develop together with the State institutions providing services in this
field.221 The first constitution proclaimed Kazakhstan to be a democratic, secular and
unitary state, but did not emphasize the leading role of the presidency as was done in the
succeeding constitution. Also it gave more discretion to the Parliament which not only
was involved in the law making but also: a) elected the Constitutional Court; b) elected
the Supreme Court and the High Court of Arbitration, c) appointed the ProsecutorGeneral, and d) appointed the Chairman of the National Bank. 222 Of course, the first
constitution paid attention to the new forms of economy such as private property and
private entrepreneurship. It declared that “[p]rivate property shall be inviolable. The State
shall guarantee the freedom of entrepreneurship activity and ensure its defense and
support”.223 At the same time the constitution stipulated the intention of the State to keep
“[l]and, its bowels, rivers and lakes, flora and fauna, other natural resources” as its
“exclusive property.”224
219
Id.
Id. at 113.
221
Id.
222
Id. at 118.
223
The Constitution of the Republic of Kazakhstan of January 28, 1993, (articles 47, 48).
224
Id. art.46.
220
38
According to the first Constitution, foreigners, legal entities and “persons not
admitted to citizenship” were participants in entrepreneurial activity and were under the
protection of the Republic of Kazakhstan “as stipulated by laws and interstate agreements
of the Republic of Kazakhstan”.225
In the beginning of 1995 the Republic of Kazakhstan found itself in the “midst of a
constitutional crisis” the result of which was the dissolution of the parliament.226 The first
Constitution did not help to fulfill the embodied tasks especially in regulating the jobs of
the legislative and executive branches, since the Kazakh parliament at that time “still
embodied the bulky mechanism of its predecessor, the Supreme Soviet of the Kazakh
SSR, and lacked any real mechanism for the execution of legislative initiative.”227
A new constitution was adopted in August 1995 by national referendum.228 The new
constitution gave more power to the president by saying, “The Republic of Kazakhstan is
a unitary state with a presidential form of government.”229 This time the President took
almost all appointing functions of the key executive officials except “election and
discharge from the office, the Chairperson of the Supreme Court, the Chairpersons of the
Collegium of Justice, and judges of the Supreme Court of the Republic and the proposal
of the President of the Republic of Kazakhstan, and swearing them into office”, which
was the duty of the upper chamber of the parliament (senate).230
225
Id. art.49
Auypova, supra note 202, at 68.
227
Id. at 67.
228
CIA-The World Fact Book available at http://www.cia.gov/cia/publications/factbook/geos/kz.html (last
visited on June 22, 2006).
229
The Constitution of the Republic of Kazakhstan of August, 30 1995, Article 2.
230
Id. Art. 55.
226
39
231
The two-chamber parliament was left mostly with law-making and approval tasks.
The new Constitution confirmed the preceding Constitution’s social protection of citizens
in terms of labor conditions, health care and housing, but paid more attention to
individual freedoms.232 Also the new Constitution did not pay much attention to the
business activity of foreign citizens except to give them “rights and freedoms as well as
responsibilities established for the Kazakh citizens unless otherwise stipulated by the
Constitution, laws and international treaties.”233 In the 1993 Constitution a whole section
was devoted to property and entrepreneurship.234 One more important feature was
transferred from the 1993 Constitution to the 1995 Constitution; the State confirmed its
intention to keep owning “the land and underground resources, waters, flora and fauna,
other natural resources.”235 Also, in the same article, the new Constitution adds, “The
land may also be privately owned on terms, conditions and within the limits established
by legislation.”236 The constitution thus reveals the attitude of the new Kazakh State to
the market economy, its readiness for foreign direct investment, international competition
and foreign business activity in the country.
231
See Arts. 55, 56 and 57 of the Kazakh Constitution of 1995.
See Section II, The Individual and Citizen of the Kazakh Constitution of 1995.
233
Id. at Art. 12.
234
See Section II, Chapter 8 (Property and Entrepreneurship) of Constitution 1993.
235
See the Constitution of the Republic of Kazakhstan of 1995, art. 6.
236
Id.
232
40
1990 Foreign Investment Law and Auxiliary Laws Facilitating Investments
In reference to the readiness of Kazakhstan for foreign direct investment we will shortly
explore the document dated December 7, 1990 and which is called “Law of the Kazakh
SSR on Foreign Investments in the Kazakh SSR, adopted Dec. 7, 1990.”237 The date of
this document suggests that the demand for foreign investments appeared earlier than
independence itself.238 In the early 1990s, the republics of the Soviet Union started the
program of privatizing State enterprises.
To be successful, privatization in countries with centrally-planned economies must
attract foreign capital for the modernization of their facilities, adopt foreign management
skills in order to capitalize in new technology, and provide sufficient internal financial
and production controls. To attract foreign participation, a country would want to enact
investment laws that facilitate the movement of capital into and out of the country.239
With this mindset the leadership of Kazakhstan drafted and adopted the law on foreign
investment. This Soviet era law was drafted to attract foreign investors and included
necessary basic incentives. It was short, comprised of only twenty nine articles.240 To
start with, one can see that that this law had no restriction on formation of enterprises;
foreign entities could have any percentage of ownership in joint ventures and also could
237
Zakon Respubliki Kazakhstan ob Inostrannyh Investitsiah Law of Kazakh SSR on Foreign Investments
in the Kazakh SSR, (Kaz.), Law No. 383-XII of December 7, 1990, KAZAKHSTANSKAYA PRAVDA.
238
Kazakhstan became independent on December 16, 1991.
239
Yuliya Mitrofanskaya, Privatization as an International Phenomenon: Kazakhstan, 14 AM. U. INT’L L.
REV. 1399, 1406, (1999)
240
Zakon Respubliki Kazakhstan ob Inotrannyh Investitsiah Law of Kazakh SSR on Foreign Investments in
the Kazakh SSR, (Kaz.), Law No. 383-XII of December 7, 1990, KAZAHSTANSKAYA PRAVDA.
41
241
have fully owned enterprises.
Foreign investors had a one-year grace period to start
operating a business before re-licensing.242 The foreign investor, who brought property
into Kazakhstan not for sale, but as an investment, did not have to pay custom duties.243
Personal property of foreign specialists working at enterprises with foreign participation
was also not subject to custom duties.244 To provide additional tax incentives, the share of
the foreign investor in the enterprise was not to be less than 30%.245 These tax incentives
were: five years free from income tax if employed in the production and services listed in
the annex to this law; after five years only 50% on income tax for the next five years.246
This law also guaranteed protection of foreign intellectual property.247 Nationalization
was not allowed and only in exceptional cases could the property of the enterprise with
foreign participation be requisitioned. Requisition was followed by full compensation of
the losses by the Government of Kazakh SSR.248 Under this law Kazakh SSR guaranteed
foreign investors the free transfer abroad of profits from business activity and liquidation
of the legal entities with foreign participation, and also in the case of investors’ shares in
those enterprises being sold.249 As for resolution of disputes between the legal entities
with foreign participation and the state organs of the republic, the law offered state
arbitration, the republican courts, or, by agreement of the parties, the dispute could be
241
Id. art. 1,4.
Id. art. 7.
243
Id. art. 16.
244
Id.
245
Id. art. 20.
246
Id.
247
Id. art. 15
248
Id. art. 25
249
Id. art. 26
242
42
250
resolved in an arbitral tribunal in accordance with the legislation of the Republic.
Article 29 of the 1990 investment law contained an important condition: “If an
international agreement or treaty of the Republic establishes rules of dispute resolution
other than those under this law, the rules of an international agreement or treaty must be
applied.”251 At this time to adopt only one law to attract foreign direct investment, even a
very progressive one, was not enough. In the 1990s, almost simultaneously with the law
on foreign investment, a number of other laws designated to facilitate foreign investment
in Kazakhstan were adopted:
a)
The law of the Kazakh SSR on Property, adopted December 15, 1990, which on
the one hand confirmed the constitutional right of the State to own “…[t]he earth, its
bowels, rivers and lakes…,” and on the other hand let the foreigners own property and
guaranteed stability of property relations.
b)
The law of the Kazakh SSR on Leasing, adopted Feb. 2, 1990, under which “Land
and other natural resources can be leased.”
c)
The law of the Kazakh SSR on Free Enterprise and Development of
Entrepreneurship in the Kazakh SSR, adopted Dec. 11, 1990, under which the
government identified the objects of foreign investments, on the territory of the Kazakh
SSR as: “enterprises, which share participation in the property of Soviet juridical entities,
shares and other securities and such other property as well as the acquired property rights
to use natural resources in the Kazakh SSR for carrying out the economic and any such
activity on the Kazakh SSR territory.”
250
251
Id. art. 28.
Dosmukhamedov, supra note 207, at 102.
43
d)
The law of the Kazakh SSR on Free Economic Zones in the Kazakh SSR,
adopted Dec. 15, 1990. This law was intended to create “specially allocated territory with
clearly defined administrative borders and special legal conditions established with the
aim of attracting foreign capital, progressive foreign technology and management
experience for accelerated social and economic development of the territory of the
zone.”252 The tax incentives in these free economic zones were as attractive as those in
the law on foreign investments.253
An abundance of mineral resources and a stable political situation could make
Kazakhstan an attractive object for investment, the 2004 estimated oil proved reserves are
twenty--six billion barrels and estimated reserves of natural gas are three trillion cubic
meters.254
In addition, Kazakhstan accounted for “ninety percent of the chrome reserves of the
former Soviet Union, fifty percent of the tungsten and lead, and forty percent of the zinc
and copper deposits. Kazakhstan was one of the Soviet Union’s bread baskets, producing
about thirty-three percent of its total agricultural production.” 255 Post Soviet Kazakhstan
managed to escape “the ethnic tension which has infected the Caucasian republics and the
Central Asian states”, and the country is regarded as “one of the most stable states of the
former Soviet Union.”256 Moreover, Kazakhstan itself was seeking foreign direct
252
Andrew B. Derman, KAZAKHSTAN: How a New Petroleum Law Can Fuel Economic Development,
TULSA J. COMP. & INT’L L. 57, 65-68, (1993).
253
Article 13 in the Law on the Free Economic Zone says that entities within economic zones are profit tax
exempt from two to five years from receipt of declared profit and there is no limitation on certain activities
listed in the annex of the investment law of 1990, which covered the rest of the Republic.
254
CIA-The World Fact Book available at http://www.cia.gov/cia/publications/factbook/geos/kz.html
(visited on June 26, 2006).
255
Derman, supra note 252, at 58.
256
Id. at 57, 58.
44
investment because “foreign participation helps to introduce new technology and
establish adequate systems of management and quality control.”257 The President of
Kazakhstan “has repeatedly emphasized that foreign investment and strong foreign
relations are essential for the effective development of Kazakhstani natural resources,”
and “[s]ince Kazakhstani policy is to attract foreign investors, legislation is intended to
create a favorable investment climate.”258 Later, research on foreign investment has
demonstrated that Kazakhstan, in comparison with other former Soviet republics, “carries
a relatively low risk” for foreign investors.259 The successful policy of attracting foreign
investment has resulted in a $25 billion, 40-year term contract with a major American oil
company, Chevron, and the consequent entrance into the Kazakhstan market of other
leading oil companies such as British Gas, British Petroleum, Italian Agip, Mobil and
French Elf-Aquitaine.260 But the goal of Kazakhstan’s leadership was not only to attract
international attention as an important source of oil, gas and mineral resources, but also to
seek “foreign direct investment in other sectors, including agriculture, light industry,
power, tourism, and infrastructure. The development of these sectors will enable the
country to establish a diversified economy and avoid the problems encountered by some
other economies dependent on energy production.”261
257
Mitrofanskaya, supra note 239, at 1432.
Id.
259
Id.
260
Dosmukhamedov, supra note 207, at 94.
261
OECD Centre for Co-operation with Non-Members, Investment Guide for Kazakhstan, 3, (1998)
[hereinafter OECD].
258
45
1994 Foreign Investment Law and the 1997 Supplementary Law
The positive spirit of the intention and readiness to attract foreign investments
launched in the first law on foreign investments was transformed into the next law on
foreign investment, which was adopted on December 27, 1994.262 The reason that the
new investment law was introduced was that the 1990 foreign investment law (FIL) was
introduced when Kazakhstan was still a part of the Soviet Union. In addition, the 1990
FIL was drafted in Moscow, and in 1994, in order to show the independence from its
northern neighbor; the Parliament of Kazakhstan adopted a new investment law which
was solely the law of a new state.263 The 1994 FIL continued to encourage foreign direct
investment by offering the same “tax holidays” as in the predecessor law. What was new
was the additional measure of protection of investors against negative changes in
legislation. The law states that in cases where the changes in legislation would be
detrimental to the foreign investor, the legislation which existed when the contract was
signed would cover the investor for ten years, and in respect to the long term contracts
(more than ten years), changes in the law will not negatively impact the contract for the
whole duration of the contract.264 And in cases where the changes in the legislation
improve the starting situation of the foreign investor the contract may be changed by
mutual agreement between the investor and the state representatives.265 Another
262
Zakon Respubliki Kazakhstan ob Inostrannyh Investitsiah Law of the Republic of Kazakhstan on
Foreign Investments, Law No. 266-XIII on December 27, 1994, KAZAKHSTANSKAYA PRAVDA.
263
Nichols, supra note 203 at 1261.
264
Zakon Respubliki Kazakhstan ob Inostrannyh Investitsiah Law of the Republic of Kazakhstan on
Foreign Investments, Law No. 266-XIII on December 27, 1994, Article 6. KAZAKHSTANSKAYA PRAVDA
265
Id.
46
improved feature of the 1994 FIL was a new framework for the settlement of
investment disputes:
-
-
-
-
Where possible, investment disputes are to be resolved by negotiation. If
no settlement has been reached by negotiation after a period of three
months, any of the parties involved may refer the investment dispute
(subject to the written agreement of the foreign investor) to a court in
Kazakhstan or (in the event that such a dispute resolution procedure has
been previously agreed) to any one of the following arbitration authorities:
The International Centre for the Settlement of Investment Disputes (the
“ICSID”), provided the foreign investor’s government is a signatory to the
same.
The Additional Facility of the ICSID (functioning according to the Rules
of the Additional Facility) if the investor’s government is not a signatory
to the ICSID Convention.
Arbitration authorities established in accordance with the Arbitration
Regulations of the Commission of the United Nations Organization for
International Trade Law.
The Arbitration Institute of the Chamber of Commerce in Stockholm.
The Arbitration Commission of the Chamber of Commerce and Industry
of the Republic of Kazakhstan.
When one of the listed authorities is specified, the consent of the Republic
is given automatically.266
Three years later a new law supplementary to the 1994 FIL was adopted. The new
document was called “The Law on State Support of Direct Investments” and it was the
result of pressure placed on the Kazakhstan government by the international financial
organizations which held out large loans as an incentive for adopting this supplementary
law.267 An important part of this law was the creation of a State Committee on
Investments. Due to this Committee on Investments, one third of the federal ministries
and government agencies were eliminated and a Committee was “given sole
responsibility for carrying out government policies with respect to direct foreign
266
267
OECD, supra note 261, at 43.
Id. at 1262.
47
268
investment.”
The importance of this “move” lay in “placing all decision-making
capacity for foreign investment in one agency,” thus simplifying the process of licensing
and registration of the foreign investor.269 The government declared that the purpose of
this law was:
1.
2.
3.
4.
5.
6.
7.
8.
Introduction of new technologies and know-how
Filling the domestic market with high quality goods and services
State support and stimulation of domestic producers
The development of import substitute industries
Rational and complex utilization of mineral resources of the country
The introduction of modern way of management and marketing
The creation of new jobs
The introduction of the system of nonalienating training of the local work force
and raising their qualification
9. The intensification of production
10. The improvement of environmental situation 270
This law not only confirmed the existing tax and custom incentives but considerably
reduced the control of the state representatives in terms of free transfer of capital; the
state obligated itself not to create monopolies controlling the sales of mineral resources;
and the state also refused to regulate prices in sales or mineral resources, the state gave
permission to foreign investors to open bank accounts in national currency and exchange
into hard currency and vice versa.271 The 1997 law was drafted “by a small group of
foreign advisors, and was modeled on laws that had been transplanted into Southeast
Asia. Those laws, in turn, had been modeled on Western laws.”272 This law also defined
priorities for foreign investments: “Designated priority sectors exclude the energy sector,
268
Nichols, supra note 203, at 1262.
Id.
270
Zakon Respubliki Kazakhstan o Gosudarstvennoi Podderzhke Priamyh Investitsyi The Law of the
Republic of Kazakhstan on State Support of Direct Investments, No 75-1 on February 28, 1997 (hereinafter
the Law of 1997) KAZAKHSTANSKAYA PRAVDA.
271
Id. article 8.
272
Nichols, supra note 203, at 1262.
269
48
which the government rightly judges does not need special incentives to attract foreign
investment. The designated sectors cover infrastructure, light industry, agriculture,
housing, social investment in heath and education”273 This section on Kazakhstan
explores the laws directly related to foreign investments. Beside these laws, since the
beginning of independence a plethora of other laws and decrees were adopted in Republic
of Kazakhstan. The legal side of the activity of the state at the beginning of its
independence was one of the reasons that:
Kazakhstan has achieved significant progress in transforming itself from a
centrally planned to an open market economy. The process has been
painful: the gross domestic product of the country almost halved between
1991 and 1995. But the country’s natural resources and the structural
reforms which have been put in place have attracted increasing
commitment and growing interest form international investors.274
From 1991 to 1997, Kazakhstan captured eighty percent of the total foreign direct
investment flow designated for Central Asian republics, “It was the second most favored
destination for FDI among former Commonwealth of Independent States after Russia.
The cumulative value of FDI at the end of 1997 was at least US $4 billion.”275
As mentioned above, multiple legal documents were adopted during the time when Republic
of Kazakhstan was “getting on its feet.” It is necessary to mention that between 1995 and 1998,
the government undertook additional measures to create conditions for a market economy. Key
documents included a medium-term program for further reform of the banking systems and
programs for step-by-step transfer of social and economic organizations to local budgets, for
developing the securities market, for promoting employment growth, for developing small and
273
OECD, supra note 261, at 14.
Id. at 11.
275
Id.
274
49
medium businesses, for supporting entrepreneurial activity and for privatizing entities
in state ownership. All these measures not only created an attractive climate for foreign
investment but also promoted economic growth of the country. The GDP growth rate in
Kazakhstan in 2001 was 13.2%, in 2002 it was 9.5%, in 2003-9.2%, and in 2004-9.1%.276 It is
also easy to see that in trade Kazakhstan exported primarily: oil products (65%), base metals
(20%), food and agriculture goods (6%) and chemicals (4%). The total compounded figure in
monetary equivalent is $18.47 billion.277 Kazakhstan also managed to maintain a stable monetary
policy; the inflation rate did not exceed 6. 6% in 2001-02, and the republic’s strong
macroeconomic performance allowed repayment of all of its debt to the International Monetary
Fund seven years ahead of schedule.278 And in March 2002, the U.S. Department of Commerce
graduated Kazakhstan to market economy status under U.S. trade law.279 In respect of foreign
investments and Kazakhstan it would be impossible not to mention the role of the United States
in the recent history of Kazakhstan. In December 1991 the United States was the first country to
recognize Kazakhstan’s independence and it opened its embassy in the capital of Kazakhstan in
January 1992.280 Economic cooperation between these two countries can be rated as successful
since in 2004: “36.9% of total foreign investment in Kazakhstan came from the United States.
American companies have invested more than $6 billion in Kazakhstan since 1993. These
companies are concentrated in the oil and gas, business services, telecommunications, and
electrical energy sectors.”281 The Bilateral Investment Treaty between Kazakhstan and the
276
U.S. Department of State available at http://www.state.gov/r/pa/ei/bgn/5487.htm (last visited on June 30,
2006)
277
Id.
278
Id.
279
Id.
280
Id.
281
Id.
50
United States was signed in 1992.
282
Article II lists obligation of the parties towards
mutual investments:
On a basis no less favorable than that accorded in like situations to
investment or associated activities of its own nationals or companies, or of
nationals or companies of any third country, whichever is the most
favorable, subject to the right of each Party to make or maintain
exceptions falling within one of the sectors of matters listed in the Annex
to this Treaty.283
In this agreement we can see the features of “equal treatment” and “most favored nation”
status which are listed in Articles of GATT and Articles of WTO.284 Article II also
mentions exceptions listed in the annex of this agreement, which ensure national
treatment in the sectors or matters it has indicated below.285 The “American” list of
exceptions is represented by a broad scope of business activities such as airtransportation, ocean and coastal shipping, banking insurance, broadcasting etc.286 The
list of activities granted national treatment will give Kazakhstan grounds for selected
limitations it can employ in its further legal activity connected with investments. This
agreement as a whole offers boon conditions and expresses an overly positive attitude
towards foreign investment, in that it excludes performance requirements, and includes
the opportunity to select top managerial personnel regardless of nationality, the free
transfer of capital and much more.287 Detailed attention to this document would reach
beyond the scope of this thesis, but it is relevant to mention that dispute resolution may
282
International Centre for Settlement of Investment Disputes, Investment Promotion and Protection
Treaties, Kazakhstan/United States, 1992.(hereinafter BIT USA/Kazakhstan)
283
Id.
284
John H. Jackson, Legal Problems of International Economic Relations, 20 (2002).
285
BIT USA/Kazakhstan, supra note 282, Annex.
286
Id.
287
Id. arts. II and IV.
51
involve international arbitration organizations such as: The International Centre for the
Settlement of Investment Disputes (ICSID), the United Nations Commission on
International Trade Law (UNICTRAL) or “any other arbitration rules, as may be
mutually agreed between the parties to the dispute.”288 This bilateral agreement not only
responded to the demands of developed countries for international investments, but its
legacy influenced 1994 FIL.289 The U.S. friendly and helpful attitude towards newly
independent states played a positive role in turning Kazakhstan into a country with a
market economy. The United States of America between 1992 and 2005 “provided
roughly $1.205 billion in technical assistance and investment support in Kazakhstan. The
programs were designed to promote market reform, to establish a foundation for an open,
prosperous, and democratic society, and to address security issues.”290
2003 Investment Law
The most recent law on investment was adopted in 2003 and was called the “Law of
the Republic of Kazakhstan on Investments.”291 The content of this law gives the reader
the impression that Kazakhstan’s leadership is confident in the country’s stable and safe
economic position and thus is more demanding and selective in its attitude towards
investments. This law is more restrictive in relation to incentives than previous laws. For
288
Id. art. VI.
In the Law on Investments of 1994 the article on dispute resolution also discusses international
arbitration organizations.
290
U.S. Department of State available at http://www.state.gov/r/pa/ei/bgn/5487.htm (visited on June 30,
2006)
291
Zakon ob investitsiah Respubliki Kazakhstan Law of the Republic of Kazakhstan on Investments, No.
373-II ZPK, KAZAKHSTANSKAYA PRAVDA, Jan. 8, 2003.
289
52
instance, we can see that in respect to customs dues this law considerably limits
preferences. We can see that in the Soviet-era 1990 FIL and in 1994 FIL equipment and
personal items of foreign investors were not subject to custom dues. In the 2003
investment law the conditions for custom exemption look different. Article 17 of the
2003 FIL states:
Exemptions from customs duties may be granted with respect to imported
equipment in the following cases:
1) unavailability on the territory of the Republic of Kazakhstan of
manufacture of similar equipment and components thereof;
2) insufficient manufacture of similar equipment and components thereof on
the territory of the Republic of Kazakhstan in order to carry out activities
with respect to the investment project;
3) nonconformity of similar equipment and components thereof
manufactured on the territory of the Republic of Kazakhstan to the
requirements pertinent to such project.292
And even if exemptions were granted, they would have a time limit of one year with
“possible extension of such term, but not for the term exceeding five years from the
moment of the contract’s registration.”293
The previous law on investment stated in the section (articles) devoted to
nationalization that “[t]he nationalization of the property of enterprises with foreign
participation will not be permitted, though this protection was “immediately undercut by
a proviso permitting in exceptional circumstances requisition of investors’ property in
accordance with the procedure established by law.”294 Still, the previous law stressed the
inviolability of investments and placed this sentence at the beginning while underlining
the use of requisition as an exceptional action. In the 2003 law, Article 8 begins from:
292
Id. Article 17.
Id.
294
Gordon Elliot, Kazakhstan, Nazarbaev, Foreign Investment & Oil, 53 La. L. Rev. 1243, 1244 (1993).
293
53
“involuntary taking of the property of an investor (nationalization, requisition) for the
state needs shall be allowed in the exceptional cases which are provided by legislative
acts of the Republic of Kazakhstan”295 In 1994 investment law compensation due to
nationalization was provided in a manner similar to what is known as the Hull Formula,
which asserts that: “taking of alien property requires the payment of prompt, adequate
and effective compensation.”296 The wording was very close: “The payment is carried out
in a manner of immediate, adequate and effective compensation.”297 In the 2003
investment law, the requisition of the property of the investor “shall be carried out
together with payment of the market value of the property. The market value of the
property shall be determined in accordance with established legislation of the Republic of
Kazakhstan.”298 And if the investor does not agree with the reimbursement, “the
valuation of the requisitioned property may be challenged in court.”299 Settlement of
disputes is resolved in the same manner as in previous investment law involving the
courts of the Republic of Kazakhstan and “as well as by means of international arbitration
agreed by the parties.”300 There is an additional proviso which stipulates that “[d]isputes,
which do not pertain to the category of investment disputes, shall be resolved in
accordance with the legislation of the Republic of Kazakhstan.”301
295
Zakon Respubliki Kazakhstan ob Investitsiah Law of the Republic of Kazakhstan on Investments, No.
373-II ZPK, January 8, 2003. KAZAKHSTANSKAYA PRAVDA.
296
Henry J. Steiner et al. TRANSNATIONAL LEGAL PROBLEMS, MATERIAL AND TEXT, 471, (1994).
297
Zakon Respubliki Kazakhstan ob Inostrannyh Investitsiah Law of the Republic of Kazakhstan on
Foreign Investments, Law No. 266-XIII on December 27, 1994, Art. 7. KAZAKHSTANSKAYA PRAVDA.
298
Zakon Respubliki Kazakhstan ob Investitsiah Law of the Republic of Kazakhstan on Investments, No.
373-II ZPK, January 8, 2003, Art. 8. KAZAKSTANSKAYA PRAVDA.
299
Id.
300
Id. Art. 9
301
Id.
54
In addition, Chapter 2, Article 4 provides a list of guarantees of legal protection of
investor’s activity in Kazakhstan where “[a]n investor shall be entitled to the full and
unconditional protection of the rights and interests... backed by the Constitution.”302 In
the case where the investor will be damaged by the incorrect holding of the state body, he
will have the right to be reimbursed.303 But the guarantees shall not apply to:
changes in the Legislation of the Republic of Kazakhstan and/or coming
into force of, and/or changes to the international treaties of the Republic of
Kazakhstan, which change the procedure and conditions of import,
manufacture, sale of the excisable goods; changes and supplements which
are introduced to the legislative acts of the Republic of Kazakhstan in
order to provide for national and ecological security, healthcare and
morality.304
In this respect the 2003 investment law drops the conditions stipulated in 1994 FIL about
the detrimental character of the legal changes towards investors where “the legislation
which was current at the time the investment was made will apply for the period of ten
years, or, in the case of a long- term contract with an authorized state body, until the
expiration of that contract.”305
The general attitude toward tax and custom preferences is expressed in Article 14 of
the investment law of 2003. The idea is to take an individual approach to every
investment contract in the priority type of activity: “Investment preferences shall be
granted within the priority types of activity, the list of which is approved by the
Government of the Republic of Kazakhstan at the level of the classificatory of activity
302
Id. Art. 4.
Id.
304
Id.
305
Zakon Respubliki Kazakhstan ob Inostrannyh Investitsiah Law of the Republic of Kazakhstan on
Foreign Investments, Law No. 266-XIII on December 27, 1994, Art. 6. KAZAKHSTANSKAYA PRAVDA.
303
55
306
subtypes.”
The government of the republic is now more selective about the size of
investment and its duration: “The Government of the Republic of Kazakhstan shall
approve maximum investment volumes and duration of investment tax preferences for
each priority type of activity, under which the authorized body shall grant investment
preferences.”307 The adoption of this law confirms that the situation regarding
investments in Kazakhstan is stable. By means of this law the government of Kazakhstan
is trying to attract not only foreign investors but domestic investors as well. The title of
the 2003 investment law does not bear the word “foreign”, which means that conditions
framed there refer both to foreign and domestic investors. Defining the investor in the
2003 investment law, Article 1 states that investors are “individuals and legal entities,
which carry out the investments in the Republic of Kazakhstan.”308 The definition of
legal “entity” includes “any legal entity with foreign participation, incorporated in
accordance with the procedure established by the legislation of the Republic of
Kazakhstan.”309
The process of attracting foreign investments took place in a time of unprecedented
large-scale privatization of state property, during which “[s]tate property was transferred
to its new owners by auctions, tenders, or directly to employees at no cost, or for a
nominal charge.”310 As a result “[p]rivatization in Kazakhstan changed the system of the
national economy. It was an engine of institutional, legislative, organizational, and social
306
Zakon Respubliki Kazakhstan ob Investitsiah Law of the Republic of Kazakhstan on Investments, No.
373-II ZPK, January 8, 2003, Art. 14. KAZAKHSTANSKAYA PRAVDA.
307
Id.
308
Id. Art.1.
309
Id.
310
Mitrofanskaya, supra note 239, at 1436
56
change” and “Kazakhstan has developed completely new legislation and created new
institutions.”311 Thus, through privatization, a new class of domestic owners appeared,
and the 2003 investment law considered them as active participants in a market economy
of modern Kazakhstan.
The law of Kazakhstan has made significant progress towards providing a stable legal
environment for foreign investment since independence. As a result, legislation aimed at
promoting investment. Multiple reforms have “drawn upon the experience of more
established capitalist economies and implemented many suggestions from international
advisers. And today Kazakhstan is firmly in the vanguard of former Soviet Union
republics in adapting its legal structure to meet the needs of mixed economy.”312
311
312
Id.
OECD, supra note 261, at 70.
57
IV. CONCLUSION
This thesis discusses two examples of third world countries and their relationship with
foreign direct investment. This thesis shows that foreign investment can have an
important impact on the socioeconomic development of these countries. The analysis of
this thesis was devoted to the developing countries. It is a fact that out of 100% of foreign
direct investment only around 25% is designated for third world countries; ”European
Union nations, the United States, and Japan accounted for more than seventy percent of
world inflows.”313 Foreign direct investment “tends to originate from a few developed
market economies and go to a few developed countries”, and “current statistics show that
MNEs tend to locate their foreign operations in the richer of the richest and in the richer
of the poorest countries of the world.”314 The biggest share of FDI comes from a small
number of industrialized countries; “The United States, United Kingdom, Germany,
Japan, Switzerland, and France-account for more than eighty percent of the total global
stock of FDI.”315 The decision of multinational corporations to allocate direct investments
is dictated by “various economic stimuli, costs, government attitude, and geopolitical
considerations.”316 As demonstrated above, multinational corporations prefer to invest in
developed countries, but they also choose to invest in developing countries. This is often
313
RICHARD J. HUNTER ET AL, LEGAL CONSIDERATIONS IN FOREIGN DIRECT INVESTMENT, 28 OKLA. CITY
U.L. REV.851, 855 (2003).
314
Kojo Yelpaala, In Search of Effective Policies for Foreign Direct Investment: Alternatives to Tax
Incentive Policies, 7NW. J. INT’L L. & BUS. 208, 214 (1985)
315
Id. at 217.
316
Id. at 216.
58
determined by resources such as oil and gas. Other motivations to invest in developing
countries are that “the market may be too big to ignore, as in China and Indonesia.”317
Almost all reading material written about the relationship between Mexico and foreign
direct investment characterizes it as a “love-hate” relationship, because of country’s very
contradictory approaches to this topic. In the case of Mexico, there are many reasons that
this country is attractive for foreign investment. First of all, is Mexico’s geographic
location--the country has access to the Pacific and Atlantic oceans. Mexico is a neighbor
of the United States which makes this country an unavoidable destination for FDI. The
abundance of natural resources, especially oil and gas, has always made Mexico an
attractive target for foreign investments and the importance of this feature has
dramatically increased in recent years.318 A mild, warm climate and cheap labor, and a
relatively developed infrastructure guarantee this country constant interest from
multinational corporations. The analysis of Mexico in this thesis shows that Mexico
throughout most of the twentieth century, willfully tried to avoid foreign influence and at
all costs tried to stick to its own independent policy. For more than seventy years this
isolationist policy yielded positive results, known by the name of “Mexican economic
miracle,” the period from the1930s to almost the mid-1970s during which this country
had stable (not less than 6%) annual economic growth. There are many reasons which
contributed to the deep economic crises in the early 1980s, but the most important, in my
opinion, is inequality in income distribution. A low education level takes second place in
317
Tamara Lothian, Katarina Pistor, Local Institutions, Foreign Investment and Alternative Strategies of
Development: Some Views from Practice, 42 COLUM. J. TRANSNAT’L L. 101,106 (2003).
318
See the CIA world fact book which gives contemporary data on economic situation of Mexico).
http://www.cia.gov/cia/publications/factbook/geos/mx.html (last visited on July 3, 2006).
59
contributing to Mexico’s socioeconomic maladies. Unfortunately, the ruling class of
Mexico failed to deliver social justice and relative equality, thus failing to balance market
economy and social issues. Whether foreign direct investment is a “life saver” for Mexico
in the recent times of crisis is a disputable question. The World Bank regards FDI and
import of technology as “the second benefit” for the countries after financial investments.
It summarizes that:
the ability of countries to benefit from FDI in this and or other ways is
country and industry specific. It appears to depend on a country’s
‘absorptive’ capacity which grows strongly with better education. The
poorest countries have the least absorptive capacity and are most likely to
suffer the social and environmental dangers which come with FDI.319
It is difficult to argue with the opinion that “a certain threshold of development needs
to be reached before liberalization becomes beneficial.”320 Mexico tried to handle foreign
direct investment to its advantage when it adopted its first foreign investment law in
1973, and in spite its restrictive character, the investments continued to flow into the
country. One of the internal reasons that brought Mexico into a deep financial crisis in
spite of an abundant cash flow due to oil sales is that the Mexican government borrowed
excessively from Western financial institutions “to address long-standing economic and
social problems” after which the country ended up in a helpless situation when it could
not service the international debts.321 It took another twenty turbulent years before
Mexico adopted a laissez-faire investment law in 1993 and entered NAFTA with the
great hope that a liberalized economy and free trade would yield results in a not too
distant future. Many advocates of the liberal economy insist that due to NAFTA
319
JANET DINE, COMPANIES, INTERNATIONAL TRADE AND HUMAN RIGHTS, 109 (2005).
Id. at 107.
321
SARAH BABB, MANAGING MEXICO: ECONOMISTS FROM NATIONALISM TO NEOLIBERALISM , 9 (2001).
320
60
agreement, trade with U.S. and Canada has tripled, and beyond this agreement, Mexico
has twelve free trade agreements with more than forty countries including the European
Free Trade Area and Japan, thus putting ninety percent of trade under free trade
agreements.322 Nevertheless reducing poverty and international competitiveness continue
to be main goals of each new government, including a new one which will take over
power in December 2006.323
As for Kazakhstan, the attitude of this country to FDI was very different from that of
Mexico. When Kazakhstan became independent, it lost almost all economic ties with
other former Soviet Union republics. Like other broken pieces of the USSR, it
desperately looked for international economic partners and financial resources. Both soon
were found, thanks to an abundance of mineral resources.324 During the transition period,
Kazakhstan managed to maintain its economic and financial stability, and recently could
afford to implement a selective policy towards foreign investments. Today, economic
performance in terms of GDP growth looks very impressive. Unfortunately, in spite of
impressive economic growth figures, the population dramatically split into “haves” and
“have-nots.” Social services like health care and education experienced a sharp decline in
comparison with the Soviet era. Life expectancy decreased from an average 72 years to
64.325 During its short modern history, independent Kazakhstan was and is successful in
its policy of attracting FDI, but to being successful in attracting FDI and foreign
322
CIA-The World Fact Book available at http://www.cia.gov/cia/publications/factbook/geos/mx.html (last
visited on July 5, 2006).
323
Id.
324
World Health Organization, Europe available at http://www.euro.who.int/document/E88738.pdf (last
visited on July 5, 2006).
325
World Health Organization Europe available at
http://www.euro.who.int/eprise/main/who/progs/chhkaz/home (last visited July 5, 200).
61
assistance is not the only prerequisite to achieving sustainable growth. Sustainable
development can not be reached without complex, well thought out, socially-oriented
policies regarding, for example, education and healthcare. FDI is only one part that, with
the right proportion of regulations and incentives, can add to the general growth on the
county’s wealth. Obviously when governments try to work out the policies to attract FDI,
they should have in mind that foreign investors make specific contributions to economic
development, but also that FDI policy should not disturb national objectives or patterns of
development.326 The criteria for evaluation of FDI should include the following
imperatives, and these imperatives are taken from “official proclamations and views
expressed in several countries.”327 Foreign direct investment must:
1) complement national investment and make a significant contribution to
economic development, especially in raising living standards;
2) not displace national investors or enter into sectors adequately supplied by
national companies;
3) create positive-balance-of-payments effects, adding to the capital inflows
of the country, generating net increases in exports, and reducing
expenditures for imports;
4) increase employment at all levels and diversify employment opportunities,
especially in the technical and administrative fields; train both technicians
and managers;
5) develop local resources and use local suppliers;
6) stimulate activity in depressed regions;
7) not increase monopolistic tendencies on the market;
8) not cause a drain of local financial resources away from national investors;
9) contribute significantly to local R&D efforts, both through a transfer of
appropriate technology and the building of a base for indigenous scientific
and technical research;
10) demonstrate “good corporate citizenship” and not disturb the social and
cultural values of the host country;
326
JACK N. BEHRMAN, DECISION CRITERIA FOR FOREIGN DIRECT INVESTMENT IN LATIN AMERICA, 36
(1974).
327
Id.
62
11) assist local entrepreneurs in increasing their share of ownership and
management of industry.328
If it is possible to apply these conditions to the situation in Kazakhstan, it is
possible to say that at least half of the conditions are met by foreign investors, but
mostly in the oil and gas sectors. The absence of the investors’ interest in other
economic sectors such as production and agriculture, can be explained by the
location of Kazakhstan--it is a landlocked country with two powerful neighbors-Russia in the North and China in the South. These two countries with their
immense territories make the transportation of Kazakhstan exports very
expensive. A notion that the population is small can also play a negative role in
attracting foreign investors who may not see a potential for a consumer market.329
One of the positive Soviet legacies is the high rate of literacy in this young
country, and this factor can contribute to the decision of the investors, where they
needed educated working class. But, at the same time, the people of Kazakhstan,
as former Soviet citizens, still regard free health care and education as natural
elements of civilized life, and this can be a stumbling block for foreign investors,
who may regard Kazakhstan as a developing country with cheap labor. The fact
that Kazakhstan has no problems with foreign direct investments in the oil and
gas sectors in not a ground for optimism, as “a sudden inflow of dollardenominated revenues often leads to a sharp appreciation in the domestic
328
Id.
The territory of Kazakhstan is 2,7 million square kilometers, and the population is only 15 million
people. In contrast, Mexico’s territory is around 2 million square kilometers, but its population is 107
million people. CIA-The World Fact Book, available at
http://www.cia.gov/cia/publications/factbook/geos/mx.html (last visited on July 6, 2006).
329
63
currency. That tends to make non-profit sectors like agriculture and manufacturing less
competitive in world markets, thus leaving oil to dominate the economy.” 330 The
instability of oil prices hurts the poor the most because they are the least able to
hedge their risks, and because this resource is concentrated, the wealth comes
only into a few hands and “so is more susceptible to misdirection.”331 Kazakhstan
has had impressive GDP growth for the last few years but according to the United
Nations Human Development Index, the country ranks 78th out of 177.332
The analysis of the investment laws in Kazakhstan shows that they contain all
kinds of incentives which are able to attract the most demanding investors, but the
distant location of the country, its small population and the absence of
international waterways harm Kazakhstan’s investment image. There’s one more
reason which can outweigh a lot of positive efforts applied to “lure” FDI into
Kazakhstan. It is corruption. According to a 2002 report of the organization
Transparency International, Kazakhstan kept its 88th place ranking out of 102 in
country corruption.333 Mexico in the same table looks better, but not much,
maintaining 53rd place.334
In contrast to Kazakhstan, Mexico is not disadvantaged in regard to geographic
location and population size. Mexico has everything necessary to become a
330
The paradox of plenty, The Economist, Dec. 24, 2005, at 45.
Id.
332
UNDP report, available http://hdr.undp.org/statistics/data/country_fact_sheets/cty_fs_KAZ.html (last
visited on July 6, 2006)
333
Transparency International available at
http://ww1.transparency.org/pressreleases_archive/2002/2002.08.28.cpi.en.html (last visited on July 6,
2006).
334
Id.
331
64
wealthy, competitive, and successful state: good location, abundance of resources, big
population. Its foreign investment flow is one of the highest in Latin America, and
if we look at figures such as GDP growth, oil and gas sales, and export and import
rates, they would look very impressive and today Mexico has the ninth largest
economy in the world. Yet, we also can see that demands listed in the United
Nations Human Development Index are far from satisfactory in the areas such as
education, income per capita, health care and everything that relates to decent
conditions for human life. And this is probably one of the main reasons why so
many Mexican people try to emigrate to the United States of America.
Foreign direct investment can benefit the country’s socioeconomic
development only in the case where the leadership of the country willfully and
consequently pursues the goal of turning its developing country into a developed
country through democratic instruments promoting fair and just distribution of
wealth.
When the leadership of any country is trying hard to attract FDI, it must not
forget that the main sources of this type of investment are multinational
corporations, and corporations are created with the sole purpose, of making profit
for their shareholders. So, when corporations invest in a country they do it with
the purpose of making profit and this purpose may reflect both long and shortterm economic interest. Sometimes, when after attracting the desired amount of
FDI, the country finds itself not only without anticipated gains, but even worse off
than it was before FDI inflow. This might mean that the government did not
65
assess properly the future impact of such a decision and in some cases was excessively
optimistic or trustful when getting FDI on stipulated terms and conditions. It is
crucial to remember that “[s]ome TNCs (transnational corporations) may be
considerably more powerful than the regulating host state. Many of the TNCs
based in the USA or United Kingdom are driven by the concept of maximizing
shareholder value.”335 Moreover, when attracting FDI, the host country should not
be “lulled” by the OECD Guidelines for Multinational Enterprises in which
“ethical, environmental and other public policy commitments are treated
explicitly”, since this document is not legally binding.336
Foreign investments add positive impact to the national economy when the
leaders of the county apply all their efforts to build a society of educated, affluent,
and law-abiding citizens who know their rights and obligations.
335
336
Dine, supra note 319, at 223
Id, at 235
66
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71
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